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 June 30, 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 August 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
JUNE 30, 1994 AND DECEMBER 31, 1993
ASSETS
(Unaudited)
June 30, December 31,
1994 1993
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT,
at original cost $481 755 $475 348
Less - Accumulated depreciation 139 930 133 349
341 825 341 999
Add - Construction work in progress 8 492 5 478
350 317 347 477
INVESTMENTS
Equity in nuclear electric power company 623 601
Other 14 14
637 615
CURRENT ASSETS
Cash 1 469 2 794
Advances to affiliates 5 295 4 485
Accounts receivable -
Affiliated companies 2 036 2 413
Customers 37 579 38 743
Unbilled revenues 8 647 9 332
Prepaid property taxes - 2 538
Inventories and other 6 014 6 787
61 040 67 092
DEFERRED CHARGES 49 725 34 619
$461 719 $449 803
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
JUNE 30, 1994 AND DECEMBER 31, 1993
CAPITALIZATION AND LIABILITIES
(Unaudited)
June 30, 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 14 823 15 118
163 034 163 329
Long-term debt, less current sinking
fund requirements 157 811 158 858
320 845 322 187
CURRENT LIABILITIES
Current sinking fund requirements 1 053 1 053
Accounts payable -
Affiliated companies 8 163 10 088
Other 31 804 22 044
Accrued taxes -
Local property and other 357 3 017
Income 6 408 2 337
Other 16 726 13 125
64 511 51 664
DEFERRED CREDITS
Accumulated deferred income taxes 40 389 39 396
Unamortized investment tax credits 8 209 8 430
Other 27 765 28 126
76 363 75 952
COMMITMENTS AND CONTINGENCIES
$461 719 $449 803
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(Unaudited)
Three Months Ended Six Months Ended
1994 1993 1994 1993
(Dollars in Thousands)
ELECTRIC OPERATING REVENUES $ 98 244 $ 99 605 $216 734 $204 317
OPERATING EXPENSES
Electricity purchased for
resale, transmission and fuel 64 267 68 658 145 042 137 053
Other operation and maintenance 21 795 22 692 41 795 45 939
Depreciation 3 984 3 850 7 998 7 716
Taxes -
Income 1 011 (561) 4 021 638
Local property 1 240 1 215 2 524 2 435
Payroll and other 636 768 1 628 1 841
92 933 96 622 203 008 195 622
OPERATING INCOME 5 311 2 983 13 726 8 695
OTHER INCOME (EXPENSE)
Allowance for equity funds
used during construction 129 - 129 -
Other, net 79 (5) 166 (4)
208 (5) 295 (4)
INCOME BEFORE INTEREST CHARGES 5 519 2 978 14 021 8 691
INTEREST CHARGES
Long-term debt 3 544 3 570 7 090 6 112
Other interest charges 115 62 225 923
Allowance for borrowed funds
used during construction (88) (1) (153) (54)
3 571 3 631 7 162 6 981
NET INCOME (LOSS) 1 948 (653) 6 859 1 710
RETAINED EARNINGS -
Beginning of period 16 759 14 193 15 118 14 882
Dividends on common stock (3 884) (2 249) (7 154) (5 301)
RETAINED EARNINGS -
End of period $ 14 823 $ 11 291 $ 14 823 $ 11 291
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(Unaudited)
1994 1993
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 6 859 $ 1 710
Effects of non-cash items -
Depreciation and amortization 9 481 8 424
Deferred income taxes and investment
tax credits, net (350) 1 143
Change in working capital, exclusive of cash
and advances to affiliates 18 384 16 895
Fuel charge stabilization deferral (11 087) -
All other operating items (6 061) (9 928)
Net cash provided by operating activities 17 226 18 244
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (9 387) (7 614)
Allowance for borrowed funds used during
construction (153) (54)
Advances to affiliates (810) (2 095)
Net cash used for investing activities (10 350) (9 763)
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)
Payment of dividends (7 154) (5 301)
Retirement of long-term debt through
sinking funds (1 047) (1 060)
Net cash used for financing activities (8 201) (6 776)
Net increase (decrease) in cash (1 325) 1 705
Cash at beginning of period 2 794 507
Cash at end of period $ 1 469 $ 2 212
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the period for:
Interest (net of capitalized amounts) $ 6 942 $ 6 016
Income taxes $ (821) $ 41
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. Similarly, certain regula-
tory liabilities established by the Company are expected to be refunded
to customers over time. As of June 30, 1994, principal regulatory assets
included in deferred charges were $11.2 million associated with a rate
stabilization plan, $8.9 million for postretirement benefits costs
including pensions, $7.7 million for unrecovered plant and decommission-
ing costs for the Yankee Atomic nuclear plant, $7.2 million in litigation
costs associated with a settlement agreement with Boston Edison Company
relative to the Pilgrim nuclear power plant, $5.1 million for unrecovered
costs associated with a conservation and load management program and $4.4
million in abandonment costs for the Cannon Street generating station.
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 June 30,
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.
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COMMONWEALTH ELECTRIC COMPANY
(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 June 30,
1994, the Company's construction expenditures amounted to approximately
$9.7 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) 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 settlement results in the Company billing its
customers a significantly 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. This rate stabi-
lization results from the use of a cost deferral mechanism that was spon-
sored 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. The
deferred costs are being charged to a regulatory asset to be recovered,
with carrying charges, over the subsequent six-year period beginning in
1998 pursuant to 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. As of June 30,
1994, the Company has deferred $11.2 million, including carrying charges.
The rate stabilization mechanism is part of a long-term plan to con-
trol 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 Massachu-
setts Attorney General, this proposal has been widely supported by
various business and customer groups and other political interests.
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COMMONWEALTH ELECTRIC COMPANY
(c) 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 $623,000. 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 $7.7 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 and six months ended
June 30, 1994 and 1993 is shown below:
Three Months Ended Six Months Ended
June 30, June 30,
1994 and 1993 1994 and 1993
Increase (Decrease)
(Dollars in Thousands)
Electric Operating Revenues $(1 361) (1.4)% $ 12 417 6.1%
Operating Expenses -
Electricity purchased for resale,
transmission and fuel (4 391) (6.4) 7 989 5.8
Other operation and maintenance (897) (4.0) (4 144) (9.0)
Depreciation 134 3.5 282 3.7
Taxes -
Federal and state income 1 572 280.2 3 383 530.3
Local property and other (107) (5.4) (124) (2.9)
(3 689) (3.8) 7 386 3.8
Operating Income 2 328 78.0 5 031 57.9
Other Income 213 4260.0 299 7475.0
Income Before Interest Charges 2 541 85.3 5 330 61.3
Interest Charges (60) (1.7) 181 2.6
Net Income $ 2 601 398.3 $ 5 149 301.1
Retail Unit Sales MWH Increase 54 129 7.7 62 836 4.0
The following is a summary of unit sales for the periods indicated:
Unit Sales (MWH)
Three Months Six Months
Period Ended Total Retail Wholesale Total Retail Wholesale
June 30, 1994 1 115 847 755 293 360 554 2 370 220 1 621 182 749 038
June 30, 1993 955 347 701 164 254 183 2 045 878 1 558 346 487 532
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COMMONWEALTH ELECTRIC COMPANY
Operating Revenues
Operating revenues for the first half of 1994 increased by $12.4 million
or 6.1% from the corresponding period in 1993 due to a $8 million increase in
the cost of electricity purchased for resale, transmission and fuel, a 15.9%
increase in total unit sales and a higher level of lost base revenues related
to conservation and load management (C&LM) programs ($408,000). 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
Company has also 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 partici-
pation, a corresponding change will occur in revenues. Current three and six-
month C&LM costs were nearly level with the corresponding periods of the prior
year.
For the current quarter, despite a 16.8% increase in total unit sales,
operating revenues decreased $1.4 million or 1.4% when compared to the same
period in 1993 due to a $4.4 million decrease in the cost of electricity
purchased for resale, transmission and fuel reflecting the deferral of $11.1
million in purchased power costs related to the Company's rate stabilization
mechanism that was implemented on April 1, 1994 and a decline of $239,000 in
lost base revenues.
Also included in revenues for the three and six-month periods ended June
30, 1994 were wholesale sales to NEPOOL and to non-associate utilities of $7
million and $15.3 million, respectively, a $1.4 million and $4.2 million
increase from the corresponding periods of 1993 reflecting the changing
capacity needs of non-affiliated utilities and the New England Power Pool.
Increasingly, the Company is able to sell its excess capacity at competitive
terms and rates to satisfy various short-term requests for power from other
regional utilities. Increased emphasis on the marketing of excess power
supplies yielded estimated savings of $427,000 and $801,000 for the three and
six months ended June 30, 1994 as compared to $111,000 and $136,000 for the
respective periods last year. Fluctuations in the level of wholesale electric
sales have no impact on net income.
Electricity Purchased for Resale, Transmission and Fuel
Electricity purchased for resale, transmission and fuel costs per KWH sold
was lower in the current six-month period (6.1 cents) than the same period of
a year ago (6.7 cents) reflecting the aforementioned deferral of $11.1 million
for costs related to the Company's rate stabilization mechanism. For the
three months ended June 30, 1994 and 1993, the per KWH cost was 5.8 cents and
7.2 cents, respectively. However, the Company continues to be impacted by
contractual obligations to purchase higher-cost power procured in the 1980s
when the Company's customer base grew dramatically and forecasts predicted
continued growth. The Company is currently involved in the renegotiation of
various power contracts which include price restructuring, buy-outs and/or
generating unit shutdowns that could also reduce its cost of power. (Refer to
"Power Contract Negotiations" section to follow.)
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COMMONWEALTH ELECTRIC COMPANY
The cost of electricity purchased for resale for the six-month periods
ended June 30, 1994 and 1993 also included $2.3 million and $4.2 million of
capacity-related costs associated with certain purchased power contracts 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 $1.4 million
and $2.5 million for the respective six-month periods. For the three-month
periods ended June 30, 1994 and 1993, the Company's unrecovered costs amounted
to $2 million and $3.4 million resulting in reduced net income of $1.2 million
and $2 million, respectively. (Refer to the "Power Contracts" section to
follow.)
For the current six-month period, retail energy unit sales for each
customer segment showed improvement due to the first quarter's colder than
normal weather conditions, more moderate weather during the second quarter of
1994 and a 1.9% increase in the number of customers.
Other Operation and Maintenance
Other operation and maintenance declined by $900,000 or 4% and $4.1
million or 9% in the current quarter and first half of 1994 primarily due to
the savings of approximately $375,000 and $1.5 million, respectively, that
resulted from a second quarter 1993 work force reduction and the absence (in
both current three and six-month periods) of severance pay incurred in 1993
($1.8 million). Other factors contributing to the decreases in both the three
and six-month periods included lower affiliate services company charges ($1.1
million and $684,000) also due to the work force reduction and a decline in
the provision for bad debts ($766,000 and $458,000) due to improved collection
experience. Maintenance costs decreased $787,000 in the current six-month
period primarily due to a reduction in maintenance-related projects.
Depreciation and Taxes
The change in local property and other taxes for the three and six-month
periods reflects higher property tax rates ($26,000 and $89,000) offset by a
reduction in payroll taxes of $133,000 and $213,000. Income taxes increased
during the current periods due to the significantly higher levels of pretax
income and, to a lesser extent, an increase in the federal income tax rate to
35%.
Other Income and Interest Charges
The increase in other income in both the three and six-month periods was
due to an allowance for equity funds used during construction ($129,000) and
carrying costs ($109,000) on the fuel charge stabilization deferral. In
addition, for the six-month period, other income reflects a higher level of
interest on advances to affiliated companies ($56,000) and increased income
from non-utility operations ($66,000) primarily reflecting the absence in 1994
of a loss ($48,000 recorded in January 1993) in connection with the Company's
equity investment in Yankee Atomic Electric Company and a loss in the second
quarter of 1993 resulting from the disposition of the Cannon Street Generating
Station oil inventory ($28,000).
Total interest charges increased 2.6% for the current six-month period
reflecting the issuance of $65 million in long-term debt in late March 1993
($978,000) (which was primarily used to pay-down short-term borrowings) offset
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COMMONWEALTH ELECTRIC COMPANY
by a nearly $700,000 decline in short-term interest expense primarily reflect-
ing the absence of short-term bank borrowings this year as compared to an
average level of $29.9 million in the first half 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 Contract Negotiations
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. In a letter dated June 30, 1994,
Eastern provided to the Company and Cambridge Electric written notice of
arbitration and its designation of an arbitrator pursuant to the 1989 agree-
ments. The Company and Cambridge Electric by letter dated July 29, 1994
provided to Eastern notice of the companies' designation of an arbitrator and
on July 30, 1994 filed an action in the Middlesex Superior Court (the Court)
which seeks to have the issues which are to be the subject of the arbitration
decided by the Court.
The Company has filed with the DPU for the approval of a buy-out and
termination of another power contract with a second independent power produc-
er. If this buy-out proposal is approved, the resulting net replacement cost
savings would be passed through to the Company's customers.
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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
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
June 30, 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: August 12, 1994
