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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, 1995
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, 1995
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, 1995 AND DECEMBER 31, 1994
ASSETS
(Unaudited)
March 31, December 31,
1995 1994
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost $500 472 $496 166
Less - Accumulated depreciation 147 402 143 877
353 070 352 289
Add - Construction work in progress 7 690 5 216
360 760 357 505
INVESTMENTS
Equity in nuclear electric power company 602 654
Other 14 14
616 668
CURRENT ASSETS
Cash 1 313 1 637
Accounts receivable -
Affiliates 3 937 3 713
Customers 40 556 37 862
Unbilled revenues 7 967 8 899
Prepaid property taxes 1 369 2 739
Inventories and other 5 989 6 032
61 131 60 882
DEFERRED CHARGES 81 871 57 831
$504 378 $476 886
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1995 AND DECEMBER 31, 1994
CAPITALIZATION AND LIABILITIES
(Unaudited)
March 31, December 31,
1995 1994
(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 16 214 15 350
164 425 163 561
Long-term debt, less current sinking
fund requirements 156 767 157 817
321 192 321 378
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks - 6 400
Advances from affiliates 15 905 200
15 905 6 600
Current sinking fund requirements 1 053 1 053
Accounts payable -
Affiliates 8 315 7 716
Other 26 177 31 911
Accrued taxes -
Local property and other 2 623 3 721
Income 9 993 8 049
Other 37 647 13 691
85 808 66 141
101 713 72 741
DEFERRED CREDITS
Accumulated deferred income taxes 42 587 42 074
Unamortized investment tax credits 7 885 7 994
Other 31 001 32 699
81 473 82 767
COMMITMENTS AND CONTINGENCIES
$504 378 $476 886
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(Unaudited)
1995 1994
(Dollars in Thousands)
ELECTRIC OPERATING REVENUES $113 208 $118 490
OPERATING EXPENSES
Electricity purchased for resale,
transmission and fuel 77 963 80 775
Other operation and maintenance 19 625 20 000
Depreciation 4 102 4 014
Taxes -
Income 2 664 3 010
Local property 1 382 1 284
Payroll and other 1 010 992
106 746 110 075
OPERATING INCOME 6 462 8 415
OTHER INCOME 1 660 87
INCOME BEFORE INTEREST CHARGES 8 122 8 502
INTEREST CHARGES
Long-term debt 3 521 3 546
Other interest charges 375 110
Allowance for borrowed funds
used during construction (113) (65)
3 783 3 591
NET INCOME 4 339 4 911
RETAINED EARNINGS -
Beginning of period 15 350 15 118
Dividends on common stock (3 475) (3 270)
RETAINED EARNINGS -
End of period $ 16 214 $ 16 759
See accompanying notes.
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COMMONWEALTH ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(Unaudited)
1995 1994
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 4 339 $ 4 911
Effects of noncash items -
Depreciation and amortization 4 413 4 561
Deferred income taxes and investment
tax credits, net (464) (139)
Change in working capital, exclusive of cash,
advances to affiliates and interim financing (6 406) (1 517)
All other operating items (116) (1 238)
Net cash provided by operating activities 1 766 6 578
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (6 757) (4 016)
Allowance for borrowed funds used during
construction (113) (65)
Payment from affiliates - 1 400
Net cash used for investing activities (6 870) (2 681)
FINANCING ACTIVITIES
Payment of short-term borrowings (6 400) -
Proceeds from affiliates 15 705 -
Sinking funds payments (1 050) (1 050)
Payment of dividends (3 475) (3 270)
Net cash provided by (used for) financing activities 4 780 (4 320)
Net decrease in cash (324) (423)
Cash at beginning of period 1 637 2 794
Cash at end of period $ 1 313 $ 2 371
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 5 009 $ 4 862
Income taxes $ 315 $ 900
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 subsid-
iary 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 1994 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 required to be refunded
to its customers over time. In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed Of" (SFAS 121). SFAS 121 imposes stricter
criteria for regulatory assets by requiring that such assets be probable
of future recovery at each balance sheet date. Based on the current
regulatory framework, the Company accounts for the economic effects of
regulation in accordance with the provisions of SFAS No. 71, "Accounting
for the Effects of Certain Types of Regulation" and does not expect that
the adoption of SFAS 121, which the Company expects to adopt on January
1, 1996, will have a material impact on its financial position or results
of operations. However, this conclusion may change in the future as
competitive factors influence wholesale and retail pricing in this
industry. The principal regulatory assets included in deferred charges
were as follows:
March 31, December 31,
1995 1994
(Dollars in Thousands)
Purchased power contract buy-out $25 500 $ -
Fuel charge stabilization 14 054 16 638
Postretirement benefit costs
including pensions 12 583 11 215
Yankee Atomic unrecovered plant
and decommissioning costs 9 885 10 204
Pilgrim nuclear plant litigation costs 6 912 7 001
Cannon Street generating plant
abandonment, net 4 400 4 400
Conservation and load management 3 577 3 659
Other 971 1 049
Total regulatory assets $77 882 $54 166
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COMMONWEALTH ELECTRIC COMPANY
The principal regulatory liabilities, reflected in deferred credits -
other and relating to income taxes, were $3.7 million at both March 31,
1995 and December 31, 1994.
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,
1995 and 1994 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 presently
estimated at $141 million for the five-year period 1995 through 1999. Of
that amount, $27.1 million is estimated for 1995. As of March 31, 1995,
the Company's construction expenditures amounted to approximately $6.9
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 environ-
mental regulations.
(b) Power Contract Buy-out
The Company terminated a Power Sale Agreement (PSA) with Pepperell
Power Associates Limited Partnership (38 MW), effective January 27, 1995,
through a buy-out arrangement that was approved by the FERC and the DPU.
On April 11, 1995, the Company paid $25.5 million to Prudential Insurance
Company of America and will recover this cost with carrying charges over a
seven-year period beginning in April 1995.
(c) Decommissioning of Yankee Atomic Nuclear Power Plant
In February 1992, the Board of Directors of Yankee Atomic Electric
Company (Yankee Atomic) agreed to permanently discontinue power operation
of its plant and decommission the Yankee Nuclear Power Station (the
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COMMONWEALTH ELECTRIC COMPANY
plant). The Company's 2.5% investment in Yankee Atomic is approximately
$602,000. The most recent cost estimate to permanently shut down the
plant is approximately $396 million. The Company's share of this liabili-
ty is $9.9 million and is currently reflected in the accompanying balance
sheets as a liability and corresponding 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,
1995 and 1994 is shown below:
Three Months Ended
March 31,
1995 and 1994
Increase (Decrease)
(Dollars in Thousands)
Electric Operating Revenues $(5 282) (4.5)%
Operating Expenses -
Electricity purchased for resale,
transmission and fuel (2 812) (3.5)
Other operation and maintenance (375) (1.9)
Depreciation 88 2.2
Taxes -
Federal and state income (346) (11.5)
Local property and other 116 5.1
(3 329) (3.0)
Operating Income (1 953) (23.2)
Other Income 1 573 1 808.0
Income Before Interest Charges (380) (4.5)
Interest Charges 192 5.3
Net Income $ (572) (11.6)
Retail Unit Sales MWH Decrease (52 356) (6.0)
The following is a summary of unit sales for the periods indicated:
Unit Sales (MWH)
Three Months Ended Total Retail Wholesale
March 31, 1995 1 086 851 813 534 273 317
March 31, 1994 1 254 373 865 889 388 484
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COMMONWEALTH ELECTRIC COMPANY
Operating Revenues, Electricity Purchased for Resale, Transmission and Fuel
Operating revenues for the first quarter of 1995 decreased by $5.3
million (4.5%) from the corresponding period in 1994 due primarily to a 6%
decline in retail unit sales (including a 9.7% decrease in residential unit
sales) and nearly 30% lower wholesale unit sales that reflected reduced demand
for power resulting from extremely mild weather as compared to the record cold
experienced during the first quarter of 1994. The Company's residential
customer class provides approximately 50% of its total retail sales and
approximately 12% of those customers rely on electricity for space heating.
Also included in revenues were wholesale sales to the New England Power
Pool (NEPOOL) and to non-associate utilities of $5.2 million, a $2.3 million
decrease from the first quarter last year reflecting the changing capacity
needs of non-affiliated utilities and NEPOOL. Fluctuations in the level of
wholesale electric sales have no impact on net income.
The Company has received approval from the Massachusetts Department of
Public Utilities (DPU) to recover in revenues current costs associated with
conservation and load management (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 corresponding change will occur in revenues.
The current quarter also includes reduced power purchases due to a
combination of both scheduled and unscheduled maintenance at affiliate Canal
Electric Company's Unit 1 and a decline in power purchased from an independent
power producer (IPP) reflecting the restructuring of a power contract that
defers purchases for a six-year period. In January 1995, the Company termi-
nated a long-term power contract with another IPP through a buy-out arrange-
ment which will reduce future power costs. In addition, the current three-
month period reflects additional power purchases from several other higher-
cost non-utility generators offset somewhat by reduced generation from Canal's
Unit 2 and lower Seabrook 1 costs.
Historically, revenues collected through base rates have been designed to
reimburse the Company for all costs of operation other than fuel, the energy
portion of purchased power, transmission and C&LM costs, and provide a fair
return on capital invested in the business. However, as a result of a DPU-
approved recovery mechanism for capacity-related costs associated with certain
long-term purchased power contracts, the Company experiences a revenue excess
or shortfall to the extent that unit sales and/or the costs recoverable in
base rates vary from test-period levels. This issue, which can have a
significant impact on net income, was addressed in a settlement agreement
approved by the DPU in May 1995 whereby the Company will be allowed to defer
for future recovery the capacity-related costs in excess of such costs
currently included in the Company's retail base rates. (Refer to the "Rate
Settlement Agreement" section for additional details.)
Other Operation and Maintenance
Other operation and maintenance declined by $375,000 (1.9%) due to lower
C&LM program costs of $463,000, a decline in affiliated services company
charges ($161,000) and continued savings from consolidated management func-
tions and other on-going cost containment measures. These decreases were
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COMMONWEALTH ELECTRIC COMPANY
somewhat offset by a higher level of transmission and distribution-related
maintenance costs ($249,000) and an increase in insurance and employee benefit
costs ($286,000).
Depreciation and Taxes
Depreciation expense increased slightly due to a higher level of depre-
ciable property, plant and equipment. The $346,000 decrease in federal and
state income taxes was due to a lower level of pretax income. Local property
and other taxes increased $116,000 (5.1%) primarily reflecting higher tax
rates and assessments in the Company's service area and, to a lesser extent,
slightly higher payroll taxes.
Other Income and Interest Charges
Other income increased by $1.6 million during the current three-month
period due primarily to the partial reversal of a reserve that had been
established by the Company in December 1994 related to a settlement negotiated
with an outside party for certain costs associated with the Company's C&LM
programs ($1.4 million), the recovery of which has since been approved by the
DPU. Also contributing to the increase was the accrued interest on the fuel
charge stabilization deferral ($390,000).
Total interest charges increased $192,000 (7.2%) for the current three-
month period reflecting an increase of $265,000 in interest on short-term
borrowings which were not required in the first quarter of 1994.
Rate Settlement Agreement
On May 3, 1995, the DPU approved a settlement proposal sponsored jointly
by the Company and the Attorney General of Massachusetts. This joint petition
included the resolution of issues related to cost of service, rates, account-
ing matters and generating unit performance reviews. The Company's settlement:
(1) implements a $2.7 million annual retail base rate decrease effective
May 1, 1995 including its share of excess deferred tax reserves
related to Seabrook Unit No. 1 to be refunded to the Company by Canal
Electric Company. Further, the Company is prevented from increasing
retail base rates until October 1998;
(2) limits the Company's return on equity, as defined in the settlement,
for the period through December 31, 1997;
(3) terminates several 1987-1994 generating unit performance review
proceedings pending before the DPU;
(4) amends the Company's current fuel charge stabilization mechanism to
include deferral (without carrying charges) of certain long-term
purchased power and transmission capacity costs up to the original
limits established for the fuel charge stabilization deferral;
(5) requires the Company to fully expense costs relating to postretire-
ment benefits other than pensions in accordance with Statement of
Financial Accounting Standards No. 106 (FAS 106) and amortize the
current deferred balance of $7.6 million over a ten-year period;
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COMMONWEALTH ELECTRIC COMPANY
(6) provides eligible Economic Development Rate customers with a discount
of up to 30% but also requires these customers to provide the Company
with a five-year notice if they intend to self-generate or acquire
electricity from another provider; and
(7) prohibits the Company from seeking recovery of the costs incurred in
realizing costs savings through a 1993 work force reduction and
restructuring, totaling approximately $3 million.
The Company's management is encouraged by the support provided through
the Office of the Attorney General and believes that this settlement will
eliminate the need for potentially costly litigation and regulatory proceed-
ings and, by moderating rate impacts and enabling the Company to remain
competitive in a changing environment, is in the best interest of the Company
and its customers.
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COMMONWEALTH ELECTRIC COMPANY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal claims and matters arising from
its course of business, including its participation in power contract
arbitrations involving the termination of a power purchase agreement
with Eastern Energy Corporation as discussed more fully in the
Company's 1994 Form 10-K.
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, 1995.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
March 31, 1995.
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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 15, 1995
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet, statement of income and statement of cash flows contained in
Form 10-Q of Commonwealth Electric Company for the three months ended March
31, 1995 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000071222
<NAME> COMMONWEALTH ELECTRIC COMPANY
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