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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, 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 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, 1997
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, 1997 AND DECEMBER 31, 1996
ASSETS
(Dollars in thousands)
March 31, December 31,
1997 1996
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost $538,377 $535,004
Less - Accumulated depreciation 166,779 163,397
371,598 371,607
Add - Construction work in progress 2,471 2,315
374,069 373,922
INVESTMENTS
Equity in nuclear electric power company 597 643
Other 14 14
611 657
CURRENT ASSETS
Cash 2,104 358
Accounts receivable -
Affiliates 2,900 2,662
Customers 41,755 42,644
Unbilled revenues 6,216 6,741
Prepaid property taxes 1,512 3,024
Inventories and other 4,935 4,580
59,422 60,009
DEFERRED CHARGES
Regulatory assets 70,216 68,129
Other 4,686 3,282
74,902 71,411
$509,004 $505,999
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
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 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 32,132 27,334
180,343 175,545
Long-term debt, less current sinking
fund requirements 149,684 150,734
330,027 326,279
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 19,350 15,000
Advances from affiliates 2,345 3,070
21,695 18,070
Other Current Liabilities -
Current sinking fund requirements 3,553 3,553
Accounts payable -
Affiliates 10,193 10,213
Other 26,047 28,137
Accrued taxes -
Local property and other 2,501 3,025
Income 17,002 15,462
Other 13,362 16,274
72,658 76,664
94,353 94,734
DEFERRED CREDITS
Accumulated deferred income taxes 48,226 47,716
Unamortized investment tax credits 7,018 7,126
Other 29,380 30,144
84,624 84,986
COMMITMENTS AND CONTINGENCIES
$509,004 $505,999
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Dollars in thousands)
(Unaudited)
1997 1996
ELECTRIC OPERATING REVENUES $117,361 $117,896
OPERATING EXPENSES
Electricity purchased for resale,
transmission and fuel 77,067 79,230
Other operation and maintenance 21,751 20,113
Depreciation 4,419 4,290
Taxes -
Income 2,950 2,996
Local property 1,623 1,434
Payroll and other 959 1,040
108,769 109,103
OPERATING INCOME 8,592 8,793
OTHER INCOME 10 28
INCOME BEFORE INTEREST CHARGES 8,602 8,821
INTEREST CHARGES
Long-term debt 3,389 3,492
Other interest charges 440 504
Allowance for borrowed funds
used during construction (25) (48)
3,804 3,948
NET INCOME 4,798 4,873
RETAINED EARNINGS -
Beginning of period 27,334 20,708
Dividends on common stock - (8,789)
End of period $ 32,132 $ 16,792
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Dollars in thousands)
(Unaudited)
1997 1996
OPERATING ACTIVITIES
Net income $ 4,798 $ 4,873
Effects of noncash items -
Depreciation and amortization 7,029 5,384
Deferred income taxes and investment
tax credits, net 1,789 (694)
Change in working capital, exclusive of cash
and interim financing (1,673) (2,525)
Fuel charge stabilization deferral (4,359) 4,609
All other operating items (4,270) (504)
Net cash provided by operating activities 3,314 11,143
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (4,118) (5,537)
Allowance for borrowed funds used during
construction (25) (48)
Net cash used for investing activities (4,143) (5,585)
FINANCING ACTIVITIES
Proceeds from (payments of) short-term borrowings 4,350 (6,975)
Advances from (payments to) affiliates (725) 11,180
Payment of dividends - (8,789)
Sinking funds payments (1,050) (1,050)
Net cash provided by (used for) financing activities 2,575 (5,634)
Net increase (decrease) in cash 1,746 (76)
Cash at beginning of period 358 1,430
Cash at end of period $ 2,104 $ 1,354
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 5,074 $ 5,183
Income taxes $ 1,122 $ 639
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
subsidiary of Commonwealth Energy System. The parent company is referred
to in this report as the "System" and together with its subsidiaries is
collectively referred to as "the system." The 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 828 regular employees including 546 (66%) who are
represented by three collective bargaining units. New agreements were
reached in early 1996 with two bargaining units (representing approximate-
ly 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, respectively. The third agreement representing 12%
of regular employees expires on April 30, 1998. Employee relations have
generally been satisfactory.
(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 1996 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,
1997 and 1996 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
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COMMONWEALTH ELECTRIC COMPANY
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." The Company has 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, the regulatory liabilities established by the Company are
required to be refunded to customers over time. Effective 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. SFAS
No. 121 did not have an impact on the Company's financial position or
results of operations upon adoption. This result may change as modifica-
tions are made to the current regulatory framework due to ongoing electric
industry restructuring efforts in Massachusetts. If all or a separable
portion of the Company'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 for the
Company's remaining regulated operations. In addition, the Company would
be required to determine any impairment to the carrying costs of deregu-
lated 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 Discus-
sion and Analysis of Results of Operations.
The principal regulatory assets included in deferred charges at
March 31, 1997 and December 31, 1996 were as follows:
March 31, December 31,
1997 1996
(Dollars in thousands)
Fuel charge stabilization $26,364 $21,504
Power contract buy-out 20,020 20,794
Postretirement benefits costs
including pensions 12,092 12,092
Pilgrim nuclear plant litigation costs 6,197 6,286
Yankee Atomic unrecovered plant
and decommissioning costs 4,024 4,333
Conservation and load management costs 790 2,322
Other 729 798
$70,216 $68,129
The regulatory liabilities included in other deferred credits at
March 31, 1997 and December 31, 1996 were as follows:
March 31, December 31,
1997 1996
(Dollars in thousands)
Excess Seabrook-related deferred income taxes $ 2,269 $ 2,792
Other deferred income taxes 1,970 2,086
Excess replacement power refunds 798 982
$ 5,037 $ 5,860
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COMMONWEALTH ELECTRIC COMPANY
(3) Commitments and Contingencies
The Company is engaged in a continuous construction program presently
estimated at $109 million for the five-year period 1997 through 2001. Of
that amount, $23.3 million is estimated for 1997. As of March 31, 1997,
the Company's construction expenditures amounted to approximately $4.1
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.
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,
1997 and 1996 and unit sales for these periods is shown below:
Three Months Ended
March 31,
1997 and 1996
Increase (Decrease)
(Dollars in thousands)
Electric Operating Revenues $ (535) (0.5)%
Operating Expenses -
Electricity purchased for resale,
transmission and fuel (2,163) (2.7)
Other operation and maintenance 1,638 8.1
Depreciation 129 3.0
Taxes -
Federal and state income (46) (1.5)
Local property and other 108 4.4
(334) (0.3)
Operating Income (201) (2.3)
Other Income (18) (64.3)
Income Before Interest Charges (219) (2.5)
Interest Charges (144) (3.6)
Net Income $ (75) (1.5)
Unit Sales (Megawatthours or MWH)
Retail (743) (0.1)
Wholesale 73,606 31.9
Total unit sales 72,863 6.7
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, 1997 1,161,487 857,419 304,068
March 31, 1996 1,088,624 858,162 230,462
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COMMONWEALTH ELECTRIC COMPANY
Operating Revenues, Electricity Purchased for Resale, Transmission and Fuel
The slight decline in operating revenues for the first quarter of 1997
from the corresponding period in 1996 was due to a decrease in the cost of
electricity purchased for resale, transmission and fuel to retail customers
($4.9 million) and lower retail unit sales ($.2 million). Offsetting these
factors were higher revenues related to recovery of costs associated with
conservation and load management programs ($1.3 million) as described below
and wholesale sales ($2.8 million) reflecting the changing capacity needs of
non-affiliated utilities and the New England Power Pool. Fluctuations in the
level of wholesale electric sales have no impact on net income.
Despite the 6.7% increase in total unit sales, electricity purchased for
resale, transmission and fuel expense decreased in the current quarter due to
greater available generation (162,000 MW) (72.8%) from the Company's affili-
ate, Canal Electric Company (Canal), at a lower cost than was available from
several non-utility generating units and other contracted purchased power
sources in the same period of a year ago. Purchases from Canal were lower in
1996 due to scheduled maintenance on Canal Unit 2.
Other Operation and Maintenance
The 8.1% increase in other operation and maintenance was primarily due to
costs attributable to conservation and load management programs ($1.3 million)
due to recent approval from the Massachusetts Department of Public Utilities
(DPU) for accelerated recovery of costs, higher medical plan costs ($285,000)
and transmission and distribution costs primarily related to tree-trimming
expenses ($262,000). These expenses were offset somewhat by a decline of
$148,000 in the provision for bad debt expense.
Depreciation and Taxes
Depreciation expense increased 3% due to a higher level of depreciable
property, plant and equipment. The increase in local property and other taxes
reflects higher tax rates and assessments in the Company's service area offset
somewhat by lower payroll taxes.
Interest Charges
Total interest charges decreased $144,000 (3.6%) for the current quarter
reflecting scheduled sinking fund payments on long-term debt and a lower
average amount of short-term borrowings during the period.
Electric Industry Restructuring
In August 1995, the DPU issued an order calling for the restructuring 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
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COMMONWEALTH ELECTRIC COMPANY
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.
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 genera-
tion 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 that the Company and
Cambridge Electric have 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 genera-
tion 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 restructur-
ing; 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 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
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COMMONWEALTH ELECTRIC COMPANY
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. Transmis-
sion 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 Company
and Cambridge Electric submitted comments on the Committee's legislative
proposal making specific recommendations for changes with respect to increas-
ing 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 Company and Cambridge Electric have engaged in preliminary settlement
discussions with the Attorney General and have 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
companies would file a full restructuring plan with the DPU.
On March 31, 1997, the Company and Cambridge Electric submitted a report
to the DPU which detailed the proposed auction process for selling their
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 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 Company complies with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
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COMMONWEALTH ELECTRIC COMPANY
Regulation." In the event the Company 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) increas-
ing competition restricting the Company'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 Company periodically reviews these
criteria to ensure that the continuing application of SFAS No. 71 is appropri-
ate. 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
Company believes that its regulatory assets, including those related to
generation, are probable of future recovery.
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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, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
March 31, 1997.
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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, 1997 JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer