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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, 1998
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, 1998
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, 1998 AND DECEMBER 31, 1997
ASSETS
(Dollars in thousands)
March 31, December 31,
1998 1997
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost $553,971 $550,449
Less - Accumulated depreciation 178,617 174,488
375,354 375,961
Add - Construction work in progress 4,988 4,010
380,342 379,971
INVESTMENTS
Equity in nuclear electric power company 584 519
Other 14 14
598 533
CURRENT ASSETS
Cash 2,503 1,496
Accounts receivable -
Affiliates 788 1,753
Customers 46,553 45,199
Unbilled revenues 1,413 9,162
Prepaid property taxes 1,522 3,043
Inventories and other 4,536 4,349
57,315 65,002
DEFERRED CHARGES
Regulatory assets 79,225 70,112
Other 3,714 3,601
82,939 73,713
$521,194 $519,219
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
March 31, December 31,
1998 1997
(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 38,820 31,993
187,031 180,204
Long-term debt, less current sinking
fund requirements 146,142 147,192
333,173 327,396
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 25,600 14,900
Advances from affiliates 4,495 5,315
30,095 20,215
Other Current Liabilities -
Current sinking fund requirements 3,553 3,553
Accounts payable -
Affiliates 10,616 12,007
Other 22,927 32,826
Accrued taxes -
Local property and other 2,152 3,299
Income 20,603 19,114
Other 13,281 16,528
73,132 87,327
103,227 107,542
DEFERRED CREDITS
Accumulated deferred income taxes 50,604 50,283
Unamortized investment tax credits 6,588 6,696
Other 27,602 27,302
84,794 84,281
COMMITMENTS AND CONTINGENCIES
$521,194 $519,219
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands - unaudited)
1998 1997
ELECTRIC OPERATING REVENUES $106,101 $117,361
OPERATING EXPENSES
Electricity purchased for resale,
transmission and fuel 65,673 77,067
Other operation and maintenance 18,823 21,751
Depreciation 4,519 4,419
Taxes -
Income 4,212 2,950
Local property 1,530 1,623
Payroll and other 797 959
95,554 108,769
OPERATING INCOME 10,547 8,592
OTHER INCOME 20 10
INCOME BEFORE INTEREST CHARGES 10,567 8,602
INTEREST CHARGES
Long-term debt 3,321 3,389
Other interest charges 419 415
3,740 3,804
NET INCOME 6,827 4,798
RETAINED EARNINGS -
Beginning of period 31,993 27,334
End of period $ 38,820 $ 32,132
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands - unaudited)
1998 1997
OPERATING ACTIVITIES
Net income $ 6,827 $ 4,798
Effects of noncash items -
Depreciation and amortization 5,788 7,029
Deferred income taxes and investment
tax credits, net (179) 1,789
Change in working capital, exclusive of cash
and interim financing (5,501) (1,673)
Transition costs deferral (11,552) -
Fuel charge stabilization deferral 1,666 (4,359)
All other operating items (234) (4,270)
Net cash (used for) provided by operating activities (3,185) 3,314
INVESTING ACTIVITIES
Additions to property, plant and equipment
(inclusive of AFUDC) (4,638) (4,143)
FINANCING ACTIVITIES
Proceeds from short-term borrowings 10,700 4,350
Payments to affiliates (820) (725)
Sinking funds payments (1,050) (1,050)
Net cash provided by financing activities 8,830 2,575
Net increase in cash 1,007 1,746
Cash at beginning of period 1,496 358
Cash at end of period $ 2,503 $ 2,104
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 5,020 $ 5,074
Income taxes $ 2,509 $ 1,122
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 nonregulated companies.
The Company has 692 regular employees including 478 (69%) who are
represented by three collective bargaining units. One of these collective
bargaining units, representing approximately 12% of regular employees,
recently reached an agreement on a new five-year contract that remains in
effect until April 30, 2003. Agreements with two other bargaining units
(representing approximately 57% of regular employees) will remain in
effect until September 30, 2002 and October 31, 2001, respectively.
Employee relations have generally been satisfactory.
During the second quarter of 1997, the system initiated a voluntary
personnel reduction program. As a result of this program, the total
number of regular employees has declined by approximately 18% since
December 31, 1996.
(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 1997 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,
1998 and 1997 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
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COMMONWEALTH ELECTRIC COMPANY
various authorities including the Federal Energy Regulatory Commission
(FERC) and the Massachusetts Department of Telecommunications and Energy
(DTE).
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
various regulatory assets in cases where the DTE 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. In the event the criteria
for applying SFAS No. 71 are no longer met, the accounting impact would be
an extra-ordinary, noncash charge to operations of an amount that could be
material. Criteria that give rise to the discontinuance of SFAS No. 71
include: 1) increasing competition that restricts 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 from cost-based
regulation to another form of regulation. These criteria are reviewed on
a regular basis to ensure the continuing application of SFAS No. 71 is
appropriate. 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 genera-
tion, are probable of future recovery.
As a result of electric industry restructuring, the Company discontin-
ued application of accounting principles applied to its investment in
electric generation facilities effective March 1, 1998. The Company will
not be required to write off any of its generation-related assets,
including regulatory assets. These assets will be retained on the
Company's Balance Sheets because the legislation and the DTE's plan for a
restructured electric industry specifically provide for their recovery
through a non-bypassable transition charge.
The principal regulatory assets included in deferred charges were as
follows:
March 31, December 31,
1998 1997
(Dollars in thousands)
Power contract buy-out $16,915 $17,609
Fuel charge stabilization 28,486 29,655
Postretirement benefits costs 12,032 12,271
Transition costs 11,581 -
Yankee Atomic unrecovered plant
and decommissioning costs 3,236 3,436
Pilgrim nuclear plant litigation costs 5,824 5,929
Conservation and load management costs 157 314
Other 994 898
$79,225 $70,112
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COMMONWEALTH ELECTRIC COMPANY
The regulatory liabilities, reflected in deferred credits in the
accompanying Balance Sheets were as follows:
March 31, December 31,
1998 1997
(Dollars in thousands)
Excess Seabrook-related deferred income taxes $ 346 $ 698
Other deferred income taxes 1,875 1,875
Excess replacement power refunds 124 246
$ 2,345 $ 2,819
In November 1997, the Commonwealth of Massachusetts enacted a compre-
hensive electric utility industry restructuring bill. On November 19,
1997, the Company, together with affiliates Cambridge Electric Light
Company (Cambridge Electric) and Canal Electric Company (Canal), filed a
restructuring plan with the DTE. The plan, approved by the DTE on
February 27, 1998, describes the process by which the Company and Cam-
bridge Electric began, on March 1, 1998, to initiate a ten percent rate
reduction for all customer classes and to allow customers to choose their
energy supplier. As part of the plan, the DTE authorized the recovery of
certain strandable costs and provides that certain future costs may be
deferred to achieve or maintain the rate reductions that the restructuring
bill requires. The legislation gives the DTE the authority to determine
the amount of strandable costs that will be eligible for recovery. Costs
that will qualify as strandable costs and be eligible for recovery
include, but are not limited to, certain above market costs associated
with generating facilities, costs associated with long-term commitments to
purchase power at above market prices from independent power producers and
regulatory assets and associated liabilities related to the generation
portion of the electric business.
The cost of transitioning to competition will be mitigated, in part,
through the divestiture of the Company's non-nuclear generating assets in
an auction process that is expected to be completed in 1998. Any net
proceeds in excess of book value received from the divestiture of these
assets will be used to mitigate transition costs.
The Company's ability to recover its transition costs will depend on
several factors, including the aggregate amount of stranded costs the
Company will be allowed to recover and the market price of electricity.
Management believes that the Company will recover its transition costs. A
change in any of the above listed factors or in the current legislation
could affect the recovery of transition costs and may result in a loss to
the Company. For additional information relating to industry restructur-
ing, see the "Industry Restructuring" section under Management's Discus-
sion and Analysis and Results of Operations.
(3) Commitments and Contingencies
The Company is engaged in a continuous construction program presently
estimated at $106 million for the five-year period 1998 through 2002. Of
that amount, $23.8 million is estimated for 1998. As of March 31, 1998,
the Company's construction expenditures amounted to approximately $4.6
million, including an allowance for funds used during construction. The
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COMMONWEALTH ELECTRIC COMPANY
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,
1998 and 1997 and unit sales for these periods is shown below:
Three Months Ended
March 31,
1998 and 1997
Increase (Decrease)
(Dollars in thousands)
Electric Operating Revenues $(11,260) (9.6)%
Operating Expenses -
Electricity purchased for resale,
transmission and fuel (11,394) (14.8)
Other operation and maintenance (2,928) (13.5)
Depreciation 100 2.3
Taxes -
Federal and state income 1,262 42.8
Local property and other (255) (9.9)
(13,215) (12.1)
Operating Income 1,955 22.8
Other Income 10 100.0
Income Before Interest Charges 1,965 22.8
Interest Charges (64) (1.7)
Net Income $ 2,029 42.3
Unit Sales (Megawatthours or MWH)
Retail 4,533 0.5
Wholesale 101,792 33.5
Total unit sales 106,325 9.2
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, 1998 1,267,812 861,952 405,860
March 31, 1997 1,161,487 857,419 304,068
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COMMONWEALTH ELECTRIC COMPANY
Operating Revenues, Electricity Purchased for Resale, Transmission and Fuel
Despite a 9.2% increase in total unit sales, operating revenues for the
first quarter of 1998 were $11.3 million lower than the corresponding period
in 1997 reflecting a deferral of electricity purchased for resale and trans-
mission costs ($11.6 million) in conjunction with the Company's restructuring
plan as approved by the Massachusetts Department of Telecommunications and
Energy (DTE). The Company has unbundled its rates, provided customers with a
ten percent discount as of March 1, 1998 and affords customers the opportunity
to purchase generation supply in the competitive market consistent with the
electric industry restructuring legislation further discussed below. Delivery
rates are composed of a customer charge (to collect metering and billing
costs), a distribution charge, a transition charge (to collect stranded
costs), a transmission charge, an energy conservation charge (to collect costs
for demand-side management programs) and a renewable energy charge. Electric-
ity supply services provided by the Company include optional standard offer
service and default service. Amounts collected through these various charges
will be reconciled to actual expenditures on an on-going basis.
Total unit sales for the quarter increased primarily as a result of an
increase in wholesale sales to other utilities.
Other Operation and Maintenance
The decline in other operation and maintenance was primarily due to lower
operating costs that resulted, in part, from a personnel reduction program
(PRP) that began in the second quarter of last year ($1.5 million), a reduc-
tion in insurance and employee benefits costs ($248,000), and a reduction in
tree-trimming costs ($212,000) associated with the Company's transmission
system. The impact of these factors was offset somewhat by higher costs
relating to information technology, telecommunications and network services
($1.6 million) which includes costs associated with Year 2000 compliance.
Depreciation and Taxes
Depreciation expense increased due to a higher level of depreciable
property, plant and equipment. Federal and state income taxes increased due
mainly to the change in pretax income. The decline in local property and
other taxes was primarily due to lower payroll taxes reflecting the impact of
the PRP.
Interest Charges
Total interest charges decreased in the current quarter reflecting
scheduled sinking fund payments on long-term debt.
Industry Restructuring
On November 25, 1997, the Governor of Massachusetts signed into law the
Electric Industry Restructuring Act (the Act). Provisions of this legislation
include, among other things, a 10 percent discount on standard offer service
and retail choice of energy supplier effective March 1, 1998, with a subse-
quent increase in the discount on standard offer service to 15 percent upon
completion of divestiture of non-nuclear generating assets and possible
securitization of net non-mitigable stranded costs (which, for the Company,
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COMMONWEALTH ELECTRIC COMPANY
are primarily the result of above-market purchased power contracts with non-
utility generators); and, recovery of transition costs subject to review and
an audit process.
The Company, together with affiliates Cambridge Electric Light Company
(Cambridge Electric) and Canal Electric Company (Canal), filed a comprehensive
electric restructuring plan with the DTE in November 1997 that was substan-
tially approved by the DTE on February 27, 1998. While the Company is
encouraged with the treatment afforded transition cost recovery by the
legislation and the DTE, the mandated customer discounts could have a signifi-
cant impact on future cash flows of the Company and Cambridge Electric.
It is now likely that a referendum will appear on the ballot in November
of this year that is seeking to repeal the legislation. The Company's
management is unable to predict what the ultimate outcome of this challenge
will be.
Auction Process In March 1997, the Company, together with Cambridge
Electric and Canal, submitted a report to the DTE that detailed the proposed
auction process for selling their electric generation assets and entitlements.
The process included a standard sealed-bid auction for generation assets and
entitlements from purchased power contracts of the Company and Cambridge
Electric. The auction process provided a market-based approach to maximizing
stranded cost mitigation and minimizing the transition costs that retail
customers will have to pay for stranded cost recovery. A request for bids
from interested parties was issued last August followed by an Offering
Memorandum in October. Potential bidders examined all pertinent information
related to the generating facilities and purchased power agreements in order
to prepare and submit their first round of bids in mid-December. In January
1998, the companies selected a short list of potential bidders, each of whom
submitted a final binding bid on May 8, 1998. The ultimate selection of the
winning bidder or bidders is expected to be made after a two-week evaluation
period. The closing process and the required regulatory filings are expected
to be completed in 1998.
Year 2000
The Company has been involved in Year 2000 compliancy since 1996. A
complete inventory and review of software, information processing and delivery
systems has been completed, and work continues on computer systems wherever
necessary. While some computer systems have already been updated, tested and
placed in production, the Company expects to complete the balance of the
modifications by early 1999.
Costs associated with Year 2000 compliancy are being expensed as incurred.
The total cost of this project is expected to be funded with internally
generated funds.
Management believes that, with appropriate modifications, the Company will
be fully compliant regarding all Year 2000 issues and will continue to provide
its products and services uninterrupted through the millennium change.
Failure to become fully compliant could have a significant impact on the
Company's operations.
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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, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
March 31, 1998.
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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 15, 1998 JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer