<PAGE 1>
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, 1997
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
(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, 1997
Common Shares of Beneficial
Interest, $2 par value 21,531,784 shares
<PAGE 2>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
ASSETS
(Dollars in thousands)
March 31, December 31,
1997 1996
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost
Electric $1,153,807 $1,150,818
Gas 359,764 357,403
Other 66,500 66,365
1,580,071 1,574,586
Less - Accumulated depreciation and
amortization 549,674 536,041
1,030,397 1,038,545
Add - Construction work in progress
and nuclear fuel in process 8,811 7,082
1,039,208 1,045,627
EQUITY IN CORPORATE JOINT VENTURES
Nuclear electric power companies (2.5%
to 4.5%) 13,441 10,046
Other investments 28 3,349
13,469 13,395
CURRENT ASSETS
Cash 7,429 1,495
Accounts receivable 134,042 117,008
Unbilled revenues 19,219 31,698
Inventories, at average cost 15,786 31,525
Prepaid taxes and other 10,975 14,765
187,451 196,491
DEFERRED CHARGES
Regulatory assets 153,198 154,291
Other 20,894 19,151
174,092 173,442
$1,414,220 $1,428,955
See accompanying notes.
<PAGE 3>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
March 31, December 31,
1997 1996
(Unaudited)
CAPITALIZATION
Common share investment -
Common shares, $2 par value -
Authorized - 50,000,000 shares
Outstanding - 21,531,784 in 1997 and
21,529,676 in 1996 $ 43,064 $ 43,059
Amounts paid in excess of par value 111,746 111,685
Retained earnings 278,593 260,950
433,403 415,694
Redeemable preferred shares, less current
sinking fund requirements 12,960 13,020
Long-term debt, including premiums, less current
sinking fund requirements and maturing debt 354,262 355,305
800,625 784,019
CAPITAL LEASE OBLIGATIONS 12,406 12,346
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 88,100 118,475
Maturing long-term debt 14,260 14,260
102,360 132,735
Other Current Liabilities -
Current sinking fund requirements 9,525 8,473
Accounts payable 80,378 90,269
Accrued taxes 33,403 16,970
Other 52,678 53,835
175,984 169,547
278,344 302,282
DEFERRED CREDITS
Accumulated deferred income taxes 171,190 174,877
Unamortized investment tax credits
and other 151,655 155,431
322,845 330,308
COMMITMENTS AND CONTINGENCIES
$1,414,220 $1,428,955
See accompanying notes.
<PAGE 4>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Dollars in thousands)
1997 1996
(Unaudited)
OPERATING REVENUES
Electric $176,804 $167,678
Gas 132,267 123,723
Steam and other 7,119 7,213
316,190 298,614
OPERATING EXPENSES
Fuel and purchased power 106,259 99,019
Cost of gas sold 72,110 61,613
Other operation and maintenance 60,594 61,253
Depreciation 15,512 14,667
Taxes -
Local property and other 9,149 8,534
Federal and state income 16,674 17,397
280,298 262,483
OPERATING INCOME 35,892 36,131
OTHER INCOME 649 2,491
INCOME BEFORE INTEREST CHARGES 36,541 38,622
INTEREST CHARGES
Long-term debt 8,404 9,372
Other interest charges 1,805 1,448
Allowance for borrowed funds
used during construction (68) (105)
10,141 10,715
NET INCOME 26,400 27,907
Dividends on preferred shares 252 267
EARNINGS APPLICABLE TO COMMON SHARES $ 26,148 $ 27,640
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 21,530,378 21,529,676
EARNINGS PER COMMON SHARE $1.21 $1.28
DIVIDENDS DECLARED PER COMMON SHARE $.395 $.385
See accompanying notes.
<PAGE 5>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Dollars in thousands)
1997 1996
(Unaudited)
OPERATING ACTIVITIES
Net income $ 26,400 $ 27,907
Effects of noncash items -
Depreciation and amortization 19,993 17,583
Deferred income taxes and investment
tax credits, net 2,082 (270)
Earnings from corporate joint ventures (456) (457)
Dividends from corporate joint ventures 382 90
Change in working capital, exclusive of cash
and interim financing 21,411 6,706
All other operating items (14,446) 2,021
Net cash provided by operating activities 55,366 53,580
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) -
Electric (5,851) (8,172)
Gas (2,626) (1,381)
Other (651) (135)
Allowance for borrowed funds used during
construction (68) (105)
Net cash used for investing activities (9,196) (9,793)
FINANCING ACTIVITIES
Sale of common shares - 32
Payment of dividends (8,757) (8,556)
Payment of short-term borrowings (30,375) (33,725)
Sinking funds payments (1,104) (1,104)
Net cash used for financing activities (40,236) (43,353)
Net increase in cash 5,934 434
Cash at beginning of period 1,495 4,319
Cash at end of period $ 7,429 $ 4,753
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 9,627 $ 9,505
Income taxes $ 4,112 $ 9,986
See accompanying notes.
<PAGE 6>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) General Information
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 with investments in four operating public utility
companies located in central, eastern and southeastern Massachusetts. In
addition, the System has interests in other utility and several non-
regulated companies.
The system has 1,968 regular employees including 1,163 (59%)
represented by various collective bargaining units. A contract with a
bargaining unit representing approximately 5% of regular employees that
was scheduled to expire in May 1997 was ratified in April 1997 and is
effective through June 1, 2001.
Accounting Policies
(a) Principles of Accounting
The system's significant accounting policies are described in Note 2
of Notes to Consolidated Financial Statements included in its 1996 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.
Generally, expenses which relate to more than one interim period are
allocated to other periods to more appropriately match revenues and
expenses. Principal items of expense which are allocated other than on
the basis of passage of time are depreciation and property taxes of the
gas subsidiary, Commonwealth Gas Company (Commonwealth Gas). These
expenses are recorded for interim reporting purposes based upon projected
gas revenue. Income tax expense is recorded using the statutory rates in
effect applied to book income subject to tax for each interim period.
The unaudited financial statements for the periods ended March 31,
1997 and 1996, 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.
<PAGE 7>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
(b) Regulatory Assets and Liabilities
The system's operating utility companies are 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 system 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." Regulated subsidiaries of
the System have established 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, regulatory liabilities established
by the system are required to be refunded to customers over time.
Effective January 1, 1996, the system 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. SFAS No. 121 did not have an impact on the
system's financial position upon adoption. This result may change as
modifications are made to the current regulatory framework due to ongoing
electric industry restructuring efforts in Massachusetts. If all or a
separable portion of the system's operations becomes no longer subject to
the provisions of SFAS No. 71, a write-off of related regulatory assets
and liabilities would be required, unless some form of transition cost
recovery continues through rates established and collected under cost-
based ratemaking for the system's remaining regulated operations. In
addition, the system would be required to determine any impairment to the
carrying costs of deregulated plant and inventory assets. However, on
December 30, 1996, the DPU issued an order containing "Model Rules" for
industry restructuring that management believes would essentially allow
full recovery of stranded costs. For additional information relating to
industry restructuring, see the "Electric Industry Restructuring" section
under Management's Discussion and Analysis of Results of Operations.
The principal regulatory assets included in deferred charges were as
follows:
March 31, December 31,
1997 1996
(Dollars in Thousands)
Connecticut Yankee unrecovered plant and
decommissioning costs $ 34,051 $ 35,879
Postretirement benefits costs including
pensions 25,620 25,051
Fuel charge stabilization 24,931 21,504
Power contract buy-out 20,020 20,794
Deferred income taxes 13,638 13,597
FERC Order 636 transition costs 8,623 9,680
Yankee Atomic unrecovered plant and
decommissioning costs 7,242 7,798
Seabrook related costs 5,443 6,262
Other 13,630 13,726
$153,198 $154,291
<PAGE 8>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
On April 15, 1997, the DPU issued an accounting ruling allowing
Commonwealth Gas to include in cost-of-service postretirement benefits
costs and to amortize the deferred balance of $10.5 million at March 31,
1997 associated with these costs over a period not to exceed ten years
beginning in April 1997.
The regulatory liabilities, reflected in the accompanying Condensed
Balance Sheets and related to deferred income taxes, were $16.8 million
and $17.7 million at March 31, 1997 and December 31, 1996, respectively.
(3) Commitments and Contingencies
Construction Program
The system is engaged in a continuous construction program presently
estimated at $298 million for the five-year period 1997 through 2001. Of
that amount, $68.2 million is estimated for 1997. The program is subject
to periodic review and revision.
<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. Supplemental interim funds are
borrowed on a short-term basis and, when necessary, replaced with new
equity and/or debt issues through permanent financing secured on an
individual company basis. The system purchases 100% of all subsidiary
common stock issues and provides, to the extent possible, a portion of the
subsidiaries' short-term financing needs. These capital resources provide
the funds required for the subsidiary companies' construction programs,
current operations, debt service and other capital requirements.
For the first three months of 1997, cash flows from operating
activities amounted to approximately $55.4 million and reflect net income
of $26.4 million and noncash items including depreciation of $15.5
million, $4.5 million in amortization and deferred income taxes (net of
investment tax credits). The change in working capital since December 31,
1996, exclusive of cash and interim financing, amounted to $21.4 million
and had a positive impact on cash flows from operating activities,
reflecting lower inventory levels ($15.7 million), unbilled revenues
($12.5 million) and prepaid taxes ($5.2 million), coupled with a higher
level of accrued taxes ($16.4 million). These factors were offset, in
part, by a higher level of accounts receivable ($17.0 million) and a
decline in accounts payable ($9.9 million).
Construction expenditures for the first three months of 1997 were
approximately $9.2 million, including an allowance for funds used during
construction (AFUDC) and nuclear fuel. Construction expenditures,
preferred and common dividend requirements of the System ($8.8 million)
and the payment of short-term borrowings ($30.4 million) were funded
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 months ended
March 31, 1997 and 1996 and unit sales for these periods are shown below:
Three Months
Ended March 31,
1997 and 1996
Increase (Decrease)
(Dollars in Thousands)
Operating Revenues -
Electric $ 9,126 5.4 %
Gas 8,544 6.9
Steam and other (94) (1.3)
17,576 5.9
Operating Expenses -
Fuel and purchased power 7,240 7.3
Cost of gas sold 10,497 17.0
Other operation and maintenance (659) (1.1)
Depreciation 845 5.8
Taxes -
Local property and other 615 7.2
Federal and state income (723) (4.2)
17,815 6.8
Operating Income (239) (0.7)
Other Income (1,842) (73.9)
Income Before Interest Charges (2,081) (5.4)
Interest Charges (574) (5.4)
Net Income (1,507) (5.4)
Dividends on preferred shares (15) (5.6)
Earnings Applicable to Common Shares $(1,492) (5.4)
Unit Sales -
Electric - Megawatthours (MWH)
Retail (184) -
Wholesale 424,886 56.8
424,702 22.1
Gas - Billions of British Thermal Units (BBTU)
Firm (937) (5.2)
Interruptible and other 505 67.0
(432) (2.3)
<PAGE 11>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
The following is a summary of electric and gas unit sales for the
periods indicated:
Three Months Ended
March 31,
1997 1996
Electric Sales - MWH
Residential 474,051 486,024
Commercial 589,588 583,724
Industrial 99,772 94,051
Other 6,665 6,461
Total retail sales 1,170,076 1,170,260
Wholesale to other systems 1,173,334 748,448
Total 2,343,410 1,918,708
Gas Sales - BBTU
Residential 9,882 10,424
Commercial 4,850 5,130
Industrial 1,573 1,674
Other 952 966
Total firm sales 17,257 18,194
Off-system sales 797 249
Quasi-firm sales 3 140
Interruptible sales 451 357
Total 18,508 18,940
Electric Revenues, Fuel and Purchased Power Costs
For the first quarter of 1997, electric operating revenues increased
approximately $9.1 million or 5.4% mainly due to higher fuel and purchased
power costs ($7.2 million) and an increase in conservation and load
management (C&LM) costs ($1.8 million).
Fuel and purchased power costs increased during the first quarter by
approximately $7.2 million or 7.3% primarily due to higher wholesale unit
sales attributable to the increased availability of Canal Electric
Company's Units 1 and 2 reflecting the timing of both scheduled and
unscheduled maintenance in 1996. Also contributing to the increase was
higher fuel and replacement power costs reflecting the permanent shutdown
of the Connecticut Yankee nuclear unit during 1996 and the absence of power
from the Maine Yankee nuclear unit which remained out of service during the
current quarter while repair work continues.
Gas Revenues and Cost of Gas Sold
For the first three months of 1997, gas operating revenues increased
approximately $8.5 million or 6.9% due primarily to a higher level of cost
of gas sold ($10.5 million) offset, in part, by lower firm unit sales ($1.3
million), and a lower level of C&LM costs ($874,000).
<PAGE 12>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
The decrease in unit sales to firm customers reflects the impact of
the milder weather conditions experienced during the first quarter on all
customer segments. For the current quarter, heating degree days totaled
2,965 compared to 3,324 for the same period in 1996, a decrease of nearly
11% and 7% below normal. The fluctuation in interruptible and other sales
reflects the competitive market that exists today in the natural gas
industry.
Other Operating Expenses
For the first three months of 1997, other operation and maintenance
decreased 1.1% or $659,000 reflecting the reversal of an accrual relating
to a vacation time adjustment for Commonwealth Gas relating to a 1996 labor
dispute ($814,000) and a lower provision for bad debts ($513,000) offset,
in part, by higher C&LM costs ($952,000).
Depreciation expense increased 5.8% or $845,000 due to a higher
level of depreciable plant. The $615,000 (7.2%) increase in local property
and other taxes was due to an increase in the state unemployment tax rate
for Commonwealth Gas related to the 1996 labor dispute and higher property
tax rates and assessments within the system's service territory. Federal
and state income taxes decreased $723,000 (4.2%) and reflect the level of
pretax income.
Other Income and Interest Charges
For the first quarter of 1997, other income decreased by $1.8
million (73.9%) due primarily to the absence of the 1996 reversal of a
reserve for costs associated with Canal Electric's postretirement benefits
following Federal Energy Regulatory Commission acceptance of rate schedules
which provided for the recovery of these costs over a six-month period that
began in March 1996.
Total interest charges for the current quarter decreased 5.4% or
$574,000 due to scheduled sinking fund payments and maturing long-term debt
offset, in part, by a higher level of short-term borrowings. Short-term
interest rates were approximately 5.6% for both periods.
Electric Industry Restructuring
In August 1995, the DPU issued an order calling for the restructur-
ing of the electric utility industry in Massachusetts. On May 1, 1996, the
DPU issued a draft order containing proposed rules for implementing
electric industry restructuring, and on December 30, 1996 the DPU issued a
final order announcing its "Model Rules and Legislative Proposal" as a
guide in the creation of a competitive market for electric generation in
Massachusetts. Legislative proposals concerning electric industry
restructuring have also been filed by the Governor of the Commonwealth of
Massachusetts, on February 24, 1997, and by the Massachusetts Legislature's
own Joint Committee on Electric Utility Restructuring (the Committee), on
March 20, 1997. Each of the plans proposed by the DPU, the Governor and
the Committee is intended to provide customers with the opportunity to
achieve lower electric bills beginning on the target date of January 1,
1998.
<PAGE 13>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
In its "Model Rules," the DPU has proposed that the minimum
structural reorganization needed to create a competitive market is the
functional separation of generation, transmission and distribution within
one integrated company, and the establishment of a separate marketing
affiliate if a company retains generation assets. Other elements of the
DPU's Model Rules provide that electric customers will be able to buy their
power on the open market; distribution services will remain a service that
continues to be provided exclusively by the existing local distribution
companies in clearly defined service territories; and customers will have
three types of electric generation choices. First, customers may enter
into unregulated agreements with a competitive supplier for the provision
of generation. Second, customers may continue to buy power directly from
their electric distribution company at a price regulated by the DPU.
Third, customers who have received generation from a competitive supplier
but who, for any reason, have stopped receiving such generation will be
able to receive default generation service, provided by distribution
companies at spot market price.
In some regulatory jurisdictions, changes in the electric industry
could reduce the opportunity that currently exists for electric companies
to recover their investment in generating plant and other costs previously
approved by regulators and included in current rates. These potential
losses, which may result from subjecting electric company generation to the
pressures of a competitive market, are typically referred to as "stranded
costs." The single largest component of stranded costs which are
significant to the system relates to above market purchased power contracts
with non-utility generators. However, the DPU has concluded that it is in
the public interest to provide electric companies a reasonable opportunity
to collect net, non-mitigable stranded costs. The DPU has proposed that
stranded costs associated with owned generation facilities, regulatory
assets, and purchased power obligations be collected over the expected
economic life of the generating facility, the current amortization schedule
of the regulatory asset, or the contractual term of the purchased power
obligation, respectively. The DPU's proposal requires that any stranded
cost recovery for an electric utility be subject to mitigation efforts to
reduce embedded costs over time. The Model Rules specify that mitigation
should include such measures as sales of capacity and energy from owned
generation, renegotiation or buy-out of purchased power contracts, and
sales and voluntary writedowns of assets.
The Governor's restructuring proposal includes: a standard offer
generation service option for residential and small business customers for
a five-year period; recovery by electric utilities of net, non-mitigable
stranded costs over a 12-year period; the recovery of reasonable employee
transition costs for utility workers directly affected by electric industry
restructuring; and, at a minimum, the functional separation of generation,
transmission and distribution services. The Governor's legislation also
provides a mechanism for electric utilities to reduce their stranded costs
by financing the renegotiation or buy-out of above-market purchase power
contracts. The bill authorizes the Massachusetts Industrial Finance Agency
<PAGE 14>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
to issue electric rate reduction bonds to electric utilities that receive a
financing order from the DPU. The criteria for eligibility to apply for
the financing order include: (1) DPU approval of a plan to provide retail
access and divestiture of non-nuclear generating assets; and (2)
demonstration that such contract buy-out or purchase, including the cost of
financing, will substantially reduce costs to ratepayers.
The Committee issued both a comprehensive report, which outlines
options for the Legislature's consideration as debate on restructuring
continues, and a set of recommendations and a legislative package that is
designed to implement electric industry restructuring in Massachusetts.
Elements of the Committee's legislative proposal include the functional
separation of utility companies into generation, transmission and
distribution companies. Transmission and distribution companies would
remain regulated while generation companies would be unregulated with
pricing determined by the market. The Committee's proposal establishes a
retail access date of January 1, 1998 or later, as determined by the DPU,
calls for a 10% rate reduction for all customers and allows for the
recovery of certain net, non-mitigable stranded costs over a ten-year
period. The proposal also encourages divestiture as a mitigation measure
by authorizing companies to securitize stranded costs through the issuance
of rate reduction bonds only where the company has divested itself of non-
nuclear generation assets. On May 6, 1997, the system submitted comments
on the Committee's legislative proposal making specific recommendations for
changes with respect to increasing the time frame for recovery of stranded
costs including power contracts, the increased use of securitization and
other issues. The Massachusetts Legislature, which will render the final
passage of any restructuring law, is now considering the legislative
proposals of the DPU, the Governor and the Committee.
During the last several months, three Massachusetts electric
utilities have announced negotiated settlement agreements with the
Massachusetts Attorney General's Office (Attorney General) that include
divestiture of generating assets, provision for a ten percent reduction in
customers' charges and recovery of stranded costs through a non-bypassable
access charge. One settlement agreement has already been approved by the
DPU. Implementation of any restructuring settlement may be affected by
actions of the Massachusetts Legislature.
The system has engaged in preliminary settlement discussions with
the Attorney General and has provided the Attorney General with information
to further the development of a comprehensive settlement. In the unlikely
event that the parties are unable to complete a settlement, the system
would file a full restructuring plan with the DPU.
On March 31, 1997, the system submitted a report to the DPU which
detailed the proposed auction process for selling its electric generation
assets and entitlements. The process will include a standard, sealed-bid
auction for generation assets and an ascending-bid auction for power
contracts with the securitization of remaining obligations. The auction
process would provide a market-based approach to maximizing stranded cost
<PAGE 15>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
mitigation and minimizing the access charges that ratepayers will have to
pay for stranded cost recovery.
As described in Note 2(b) of the Notes to Condensed Financial
Statements, the system complies with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects
of Certain Types of Regulation." In the event the system is somehow unable
to meet the criteria for following SFAS No. 71, the accounting impact would
be an extraordinary, non-cash charge to operations in an amount that could
be material. Criteria that could give rise to the discontinuance of SFAS
No. 71 include: 1) increasing competition restricting the system's ability
to establish prices to recover specific costs, and 2) a significant change
in the current manner in which rates are set by regulators. The system
periodically reviews these criteria to ensure that the continuing
application of SFAS No. 71 is appropriate. Recently, the Securities and
Exchange Commission has questioned the ability of certain utilities
continuing the application of SFAS No. 71 where legislation provided for
the transition to retail competition. The issue of when and how to
discontinue the application of SFAS No. 71 by utilities during transition
to competition has been referred to the Financial Accounting Standards
Board's Emerging Issues Task Force and guidance on this issue is expected
in the near future. Based on the current evaluation of the various
factors and conditions that are expected to impact future cost recovery,
the system believes that its regulatory assets, including those related to
generation, are probable of future recovery.
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. In April, Commonwealth Gas recorded an additional liability and
corresponding regulatory asset of $1.2 million due to an increase in the
site clean-up cost estimate for an MGP site for which Commonwealth Gas was
previously cited as a Potentially Responsible Party. The DPU has approved
recovery of costs associated with MGP sites. Commonwealth Gas is also
involved in certain other known or potentially contaminated sites where the
associated costs may not be recoverable in rates. For further information
on other related environmental matters, refer to the System's 1996 Annual
Report on Form 10-K.
New Accounting Standard
The System is required to adopt Statement of Financial Accounting
Standards No. 128 (SFAS 128) "Earnings per Share" for the year ended
December 31, 1997. SFAS 128 requires the presentation of both basic and
diluted earnings per share (EPS). Diluted EPS reflects the possible impact
on EPS that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
<PAGE 16>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
The System issued potential awards in the form of common shares to certain
key employees pursuant to its Long Term Incentive Compensation Plan during
the first quarter of 1997. If SFAS 128 had been adopted for the quarter
ended March 31, 1997, both basic and diluted EPS would be $1.21.
<PAGE 17>
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 including Cambridge Electric as an intervenor in a
pending appeal at the Massachusetts Supreme Judicial Court (SJC) filed
by the Massachusetts Institute of Technology involving a DPU decision
approving a customer transition charge for the recovery of stranded
investment costs. While no schedule is set for a decision from the
SJC, Cambridge Electric anticipates a decision sometime in the second
quarter of 1997. This issue is discussed more fully in the System's
1996 Annual Report on Form 10-K. At this time, management is unable
to predict the outcome of this proceeding.
Item 2. Changes in the Rights of the Company's Security Holders
None
Item 3. Defaults by the Company on its Senior Securities
None
Item 4. Results of Votes of Security Holders
(a) The Annual Meeting of Shareholders was held on May 1, 1997.
(b) The three nominees, Kevin C. Bryant, Franklin M. Hundley and
Gerald L. Wilson, listed in the System's Notice of 1997 Annual Meeting
and Proxy Statement dated March 28, 1997 were elected to the Board of
Trustees of Commonwealth Energy System.
Item 5. Other Information
Kevin C. Bryant was elected to the System's Board of Trustees
effective May 1, 1997. Mr. Bryant, age 36, is currently Regional
President for BankBoston based in Fall River, Massachusetts. Mr.
Bryant is a graduate of Babson College and also serves on the board of
several community and civic groups.
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, 1997.
Filed herewith as Exhibit 2 is the restated Financial Data
Schedule for the three months ended March 31, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
March 31, 1997.
<PAGE 18>
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 and
Accounting Officer
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Date: May 14, 1997