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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, 1994
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, 1994
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, 1994 AND DECEMBER 31, 1993
ASSETS
(Unaudited)
March 31, December 31,
1994 1993
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT,
at original cost $478 164 $475 348
Less - Accumulated depreciation 136 718 133 349
341 446 341 999
Add - Construction work in progress 6 645 5 478
348 091 347 477
INVESTMENTS
Equity in nuclear electric power company 612 601
Other 14 14
626 615
CURRENT ASSETS
Cash 2 371 2 794
Advances to affiliates 3 085 4 485
Accounts receivable -
Affiliated companies 2 589 2 413
Customers 42 045 38 743
Unbilled revenues 9 387 9 332
Prepaid property taxes 1 269 2 538
Inventories and other 6 351 6 787
67 097 67 092
DEFERRED CHARGES 35 904 34 619
$451 718 $449 803
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1994 AND DECEMBER 31, 1993
CAPITALIZATION AND LIABILITIES
(Unaudited)
March 31, December 31,
1994 1993
(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 16 759 15 118
164 970 163 329
Long-term debt, less current sinking
fund requirements 157 808 158 858
322 778 322 187
CURRENT LIABILITIES
Current sinking fund requirements 1 053 1 053
Accounts payable -
Affiliated companies 10 713 10 088
Other 21 990 22 044
Accrued taxes -
Local property and other 2 412 3 017
Income 4 058 2 337
Other 11 749 13 125
51 975 51 664
DEFERRED CREDITS
Accumulated deferred income taxes 39 895 39 396
Unamortized investment tax credits 8 320 8 430
Other 28 750 28 126
76 965 75 952
COMMITMENTS AND CONTINGENCIES
$451 718 $449 803
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(Unaudited)
1994 1993
(Dollars in Thousands)
ELECTRIC OPERATING REVENUES $118 490 $104 712
OPERATING EXPENSES
Electricity purchased for resale,
transmission and fuel 80 775 68 395
Other operation and maintenance 20 000 23 247
Depreciation 4 014 3 866
Taxes -
Income 3 010 1 199
Local property 1 284 1 220
Payroll and other 992 1 073
110 075 99 000
OPERATING INCOME 8 415 5 712
OTHER INCOME 87 1
INCOME BEFORE INTEREST CHARGES 8 502 5 713
INTEREST CHARGES
Long-term debt 3 546 2 542
Other interest charges 110 861
Allowance for borrowed funds
used during construction (65) (53)
3 591 3 350
NET INCOME 4 911 2 363
RETAINED EARNINGS -
Beginning of period 15 118 14 882
Dividends on common stock (3 270) (3 052)
RETAINED EARNINGS -
End of period $ 16 759 $ 14 193
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(Unaudited)
1994 1993
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 4 911 $ 2 363
Effects of non-cash items -
Depreciation and amortization 4 561 4 219
Deferred income taxes and investment
tax credits, net (139) (88)
Change in working capital, exclusive of cash
and advances to affiliates (1 517) 8 205
All other operating items (1 238) (3 233)
Net cash provided by operating activities 6 578 11 466
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (4 016) (3 101)
Allowance for borrowed funds used during
construction (65) (53)
Payment from (advances to) affiliates 1 400 (3 840)
Net cash used for investing activities (2 681) (6 994)
FINANCING ACTIVITIES
Long-term debt issues - 65 000
Sale of common stock - 35 000
Payment of short-term borrowings - (67 275)
Payment to affiliates - (11 840)
Long-term debt issues refunded - (21 300)
Retirement of long-term debt through
sinking funds (1 050) -
Payment of dividends (3 270) (3 052)
Net cash used for financing activities (4 320) (3 467)
Net increase (decrease) in cash (423) 1 005
Cash at beginning of period 2 794 507
Cash at end of period $ 2 371 $ 1 512
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 4 862 $ 3 847
Income taxes $ 900 $ 247
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) Accounting Policies
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 Company's significant accounting policies are described in Note
1 of Notes to Financial Statements included in its 1993 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. For interim
reporting purposes, the Company 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.
The Company has established various regulatory assets in cases where
the Massachusetts Department of Public Utilities (DPU) and/or the Federal
Energy Regulatory Commission (FERC) have permitted, or are expected to
permit, recovery of specific costs over time. At March 31, 1994, princi-
pal regulatory assets included in deferred charges were $8.3 million for
unrecovered plant and decommissioning costs for the Yankee Atomic nuclear
plant, $7.3 million in litigation costs associated with a settlement
agreement with Boston Edison Company relative to the Pilgrim nuclear
power plant, $4.4 million in abandonment costs for the Cannon Street
generating station and $7.9 million for postretirement benefits costs,
including pensions. The principal regulatory liability, reflected in
deferred credits, was $4 million related to income taxes.
Generally, expenses which relate to more than one interim period are
allocated to other periods to more appropriately match revenues and
expenses. Income tax expense is recorded using the statutory rates in
effect applied to book income subject to tax recorded in the interim
period.
The unaudited financial statements for the periods ended March 31,
1994 and 1993 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.
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.
(2) Commitments and Contingencies
(a) Construction and Financing Programs
The Company is engaged in a continuous construction program present-
ly estimated at $141 million for the five-year period 1994 through 1998.
Of that amount, $24.8 million is estimated for 1994. As of March 31,
1994, the Company's construction expenditures amounted to approximately
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COMMONWEALTH ELECTRIC COMPANY
$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 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 environmental regulations.
(b) Decommissioning of Yankee Atomic Nuclear Power Plant
On February 26, 1992, the Board of Directors of Yankee Atomic
Electric Company agreed to permanently discontinue power operation of its
plant and decommission the facility. The Company's 2.5% investment in
Yankee Atomic is approximately $612,000. The Company's estimated decom-
missioning costs include its unrecovered share of all costs associated
with the shutdown of the facility, recovery of its plant investment, and
decommissioning and closing the plant to be $8.3 million. This amount is
reflected in the accompanying Balance Sheets as a liability and a corre-
sponding regulatory asset.
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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,
1994 and 1993 is shown below:
Three Months Ended
March 31,
1994 and 1993
Increase (Decrease)
(Dollars in Thousands)
Electric Operating Revenues $13 778 13.2%
Operating Expenses -
Electricity purchased for resale,
transmission and fuel 12 380 18.1
Other operation and maintenance (3 247) (14.0)
Depreciation 148 3.8
Taxes -
Federal and state income 1 811 151.0
Local property and other (17) (0.7)
11 075 11.2
Operating Income 2 703 47.3
Other Income 86 -
Income Before Interest Charges 2 789 48.8
Interest Charges 241 7.2
Net Income $ 2 548 107.8
Retail Unit Sales MWH Increase 8 707 1.0
The following is a summary of unit sales for the periods indicated:
Unit Sales (MWH)
Three Months Ended Total Retail Wholesale
March 31, 1994 1 254 373 865 889 388 484
March 31, 1993 1 090 531 857 182 233 349
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COMMONWEALTH ELECTRIC COMPANY
Operating Revenues, Electricity Purchased for Resale, Transmission and Fuel
Operating revenues for the first three months of 1994 increased by $13.8
million or 13.2% from the corresponding period in 1993 due to a $12.4 million
increase in the cost of electricity purchased for resale, a 1% increase in
retail unit sales due to colder than normal weather conditions and the
recovery of $647,000 in "lost base revenues" related to conservation and load
management (C&LM) programs. The recovery of lost base revenues is allowed by
the Massachusetts Department of Public Utilities (DPU) to encourage effective
implementation of C&LM programs. The KWH savings that are realized as a
result of the successful implementation of C&LM programs serve as the basis
for determining lost base revenues. The increase in revenues was partially
offset by a $123,000 decrease in C&LM costs. The Company has received
approval from the DPU to recover in revenues current costs associated with
C&LM programs through the operation of a Conservation Charge decimal on a
dollar-for-dollar basis. To the extent that these expenses increase or
decrease from period to period based on customer participation, a corre-
sponding change will occur in revenues.
Also included in revenues were wholesale sales to NEPOOL and to non-
associate utilities of $8.3 million, a $2.7 million increase from the first
quarter last year reflecting the changing capacity needs of non-affiliated
utilities and the New England Power Pool. Fluctuations in the level of
wholesale electric sales have little, if any, impact on net income.
The per KWH cost of electricity purchased for resale was slightly higher
in the current quarter (6.4 cents) than the same period of a year ago (6.3
cents) and reflects the impact of the Company's continuing contractual obliga-
tions to purchase higher-cost power procured in the 1980s when the Company's
customer base grew dramatically and forecasts predicted continued growth. The
contracts, which typically provide for long-term purchases from certain gas-
fired independent power producing (IPP) facilities, will continue to drive
costs up as additional capacity comes on line. The Company is currently
involved in the renegotiation of a number of existing contracts which include
price restructuring, buy-outs and/or generating unit shutdowns that could also
reduce its cost of power. Also contributing to the increase was the higher
cost of oil at affiliate Canal Electric Company which averaged 2.7 cents per
KWH for the current three-month period compared to 2.3 cents for the same
period in 1993.
The cost of electricity purchased for resale for the three-month periods
ended March 31, 1994 and 1993 also included $357,000 and $771,000, respective-
ly, of capacity-related costs associated with certain purchased power con-
tracts that were not recovered in revenues due to the recovery mechanism
established by the DPU. The impact of this under-recovery reduced net income
by $216,000 and $469,000 for the respective quarterly periods. (Refer to the
"Power Contracts" section to follow.)
Other Operating Expenses
Other operation and maintenance declined by $3.2 million or 14% in the
first quarter of 1994 due, in part, to the cost savings of approximately $1.1
million that resulted from a second quarter 1993 work force reduction. Other
factors contributing to the decrease include lower employee medical benefit
costs of $470,000, lower affiliate services company charges ($450,000) also
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COMMONWEALTH ELECTRIC COMPANY
due to the work force reduction, a decline of $300,000 in the provision for
bad debt expense due to improved collection experience and a decline of
$123,000 in C&LM costs (to $1 million) which are being recovered currently in
revenues.
The change in local property and other taxes reflects higher property tax
rates ($64,000) offset by a reduction in payroll taxes of $81,000. Income
taxes increased during the current period due to the significantly higher
level of pretax income and, to a lesser extent, an increase in the federal
income tax rate to 35% which was implemented on July 1, 1993.
Other Income and Interest Charges
The increase in other income was due to interest on advances to affiliat-
ed companies ($63,000) and a higher level of income from non-utility opera-
tions ($47,000) primarily reflecting the absence in 1994 of a loss (recorded
in January 1993) in connection with the Company's equity investment in Yankee
Atomic Electric Company.
Total interest charges increased 7.2% for the current three-month period
reflecting the issuance of $65 million in long-term debt in late March 1993
($1 million) offset by a $750,000 decline in short-term interest expense
primarily reflecting the absence of short-term bank borrowings this year as
compared to an average level of $52.4 million in the first quarter of 1993.
Power Contracts
The Company has long-term contracts for the purchase of electricity from
various sources. Generally, these contracts are for fixed periods and require
that the Company pay a demand charge for its capacity entitlement in each unit
and an energy charge to cover the cost of fuel. The Company collects a
portion of its capacity-related purchased power costs associated with certain
long-term power arrangements through its base rates. The recovery mechanism
for these costs uses a per KWH factor which is calculated using historical
(test-period) capacity costs and unit sales. This factor is then applied to
current monthly KWH sales. When current period capacity costs and/or unit
sales vary from test-period levels, the Company experiences a revenue excess
or shortfall. All other capacity and energy-related purchased power costs are
recovered through the Company's Fuel Charge.
Power Agreement Cancelled
On May 2, 1994, the Company and its affiliate Cambridge Electric Light
Company (Cambridge Electric) gave notice of termination of power purchase
agreements with Eastern Energy Corp. (Eastern), the developer of a proposed
300 MW coal-fired plant in New Bedford, Massachusetts. In June 1989, in order
to meet rising energy requirements, the Company and Cambridge Electric agreed
to buy 27% (50 MW and 33 MW, respectively) of the power to be produced by the
proposed plant, originally scheduled to begin operation in January 1992. That
date and later revised scheduled operating dates have not been achieved, and
the proposed plant has still not received the necessary permits. Efforts to
reshape the Eastern power purchase agreements to provide a satisfactory
arrangement were unsuccessful. The companies' actions are based on Eastern's
failure to meet its contractual obligations. The Company and Cambridge
Electric are unable to predict whether or not Eastern will contest their
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COMMONWEALTH ELECTRIC COMPANY
termination of these agreements.
Rate Stabilization Plan
The Company implemented a Fuel Charge (FC) rate settlement on April 1,
1994 that will stabilize its quarterly FC rate during the years 1994 through
1996 at 6.5 cents per KWH and between 6.5 cents and 6.7 cents per KWH during
1997. This rate stabilization results from the use of a cost deferral mecha-
nism that was sponsored jointly by the Company and the Massachusetts Attorney
General and approved by the DPU. The stabilized FC rate could save customers
between 1.75% and 5% on their annual electric bills from 1994 through 1997.
Deferred costs will be set up as a regulatory asset to be recovered, with
carrying charges, over the subsequent six-year period beginning in 1998 under
a recovery schedule to be approved by the DPU. The deferred amount, excluding
carrying charges, is restricted to a maximum of $40 million during the
settlement period (1994 through 1997) and is further limited to an annual cost
deferral of $16 million which is the amount the Company anticipates will be
deferred in 1994.
The rate stabilization mechanism is part of a long-term plan to control
the Company's retail rates. This plan will help to eliminate the disincentive
for economic development resulting from a volatile and unpredictable FC rate.
The stabilized FC rate will enable current and prospective customers to better
plan their business and personal finances in a more efficient and effective
manner. In addition to the Massachusetts Attorney General, this proposal has
been widely supported by various business and customer groups and other
political interests.
The settlement results in the Company billing its customers a signifi-
cantly lower rate than would have been in effect on April 1, 1994 had the DPU
not approved the proposal. The Company's customers would have been billed for
increased costs that resulted from certain higher-priced, long-term contract
obligations. The Company is currently involved in contract renegotiations, as
mentioned previously in this discussion.
Environmental Matters
The Company has been named a potentially responsible party for a site
used to dispose of PCB-contaminated transformers. A reserve for the estimated
cost of site clean-up in the amount of $50,000 was recorded in Other Operation
expense in the first quarter of 1994.
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COMMONWEALTH ELECTRIC COMPANY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended March
31, 1994.
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COMMONWEALTH ELECTRIC COMPANY
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 ELECTRIC COMPANY
(Registrant)
Principal Financial Officer:
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Principal Accounting Officer:
JOHN A. WHALEN
John A. Whalen,
Comptroller
Date: May 13, 1994
