<PAGE 1>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549-1004
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 1-7316
COMMONWEALTH ENERGY SYSTEM
(Exact name of registrant as specified in its Declaration of Trust)
Massachusetts 04-1662010
(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)
Registrant's telephone number, including area code (617) 225-4000
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, 1995
Common Shares of Beneficial
Interest, $4 par value 10,706,391 shares
<PAGE 2>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994
ASSETS
(Unaudited)
June 30, December 31,
1995 1994
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost
Electric $1 059 780 $1 047 140
Gas 337 346 338 111
Other 60 137 59 213
1 457 263 1 444 464
Less - Accumulated depreciation and
amortization 484 552 461 310
972 711 983 154
Add - Construction work in progress
and nuclear fuel in process 30 582 15 974
1 003 293 999 128
LEASED PROPERTY, net 15 544 15 729
EQUITY IN CORPORATE JOINT VENTURES
Nuclear electric power companies (2.5% to 4.5%) 9 921 9 818
Other investments 3 623 3 830
13 544 13 648
CURRENT ASSETS
Cash and cash equivalents 3 382 7 722
Accounts receivable 82 211 92 157
Unbilled revenues 11 849 33 161
Inventories, at average cost 25 486 33 586
Prepaid taxes and other 6 438 14 664
129 366 181 290
DEFERRED CHARGES 161 694 134 921
$1 323 441 $1 344 716
<PAGE 3>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994
CAPITALIZATION AND LIABILITIES
(Unaudited)
June 30, December 31,
1995 1994
(Dollars in Thousands)
CAPITALIZATION
Common share investment -
Common shares, $4 par value -
Authorized - 18,000,000 shares
Outstanding - 10,644,264 in 1995 and
10,525,897 in 1994 $ 42 577 $ 42 103
Amounts paid in excess of par value 107 492 103 168
Retained earnings 228 599 217 726
378 668 362 997
Redeemable preferred shares, less current
sinking fund requirements 14 410 14 660
Long-term debt, including premiums, less current
sinking fund requirements and maturing debt 396 732 418 307
789 810 795 964
CAPITAL LEASE OBLIGATIONS 13 805 14 098
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 23 150 44 850
Maturing long-term debt 35 000 25 000
58 150 69 850
Other Current Liabilities -
Current sinking fund requirements 6 793 6 793
Accounts payable 113 901 117 953
Accrued taxes 12 294 17 947
Other 38 711 38 504
171 699 181 197
229 849 251 047
DEFERRED CREDITS
Accumulated deferred income taxes 163 548 160 944
Unamortized investment tax credits
and other 126 429 122 663
289 977 283 607
COMMITMENTS AND CONTINGENCIES
$1 323 441 $1 344 716
See accompanying notes.
<PAGE 4>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(Unaudited)
Three Months Ended Six Months Ended
1995 1994 1995 1994
(Dollars in Thousands)
OPERATING REVENUES
Electric $137 482 $147 836 $288 995 $319 079
Gas 67 072 62 757 175 050 198 306
Steam and other 3 539 3 039 9 272 9 153
208 093 213 632 473 317 526 538
OPERATING EXPENSES
Fuel and purchased power 76 252 79 891 163 468 182 020
Cost of gas sold 39 419 36 515 90 555 107 922
Other operation and maintenance 62 800 65 174 124 691 127 897
Depreciation 11 244 10 350 24 995 23 239
Taxes -
Local property and other 5 864 5 716 14 227 13 604
Federal and state income (4 040) 1 785 8 817 19 520
191 539 199 431 426 753 474 202
OPERATING INCOME 16 554 14 201 46 564 52 336
OTHER INCOME 1 184 198 3 087 808
INCOME BEFORE INTEREST CHARGES 17 738 14 399 49 651 53 144
INTEREST CHARGES
Long-term debt 9 772 9 852 19 571 19 702
Other interest charges 1 884 931 3 317 1 974
Allowance for borrowed funds
used during construction (348) (144) (600) (243)
11 308 10 639 22 288 21 433
NET INCOME 6 430 3 760 27 363 31 711
Dividends on preferred shares 282 297 564 594
EARNINGS APPLICABLE TO
COMMON SHARES $ 6 148 $ 3 463 $ 26 799 $ 31 117
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 10 624 812 10 382 879 10 595 564 10 355 670
EARNINGS PER COMMON SHARE $ .58 $ .32 $2.53 $3.00
DIVIDENDS DECLARED PER
COMMON SHARE $ .75 $ .75 $1.50 $1.50
See accompanying notes.
<PAGE 5>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(Unaudited)
1995 1994
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 27 363 $ 31 711
Effects of noncash items -
Depreciation and amortization 30 987 29 937
Deferred income taxes and investment
tax credits, net (577) 1 093
Earnings from corporate joint ventures (763) (849)
Dividends from corporate joint ventures 867 543
Change in working capital, exclusive of cash,
cash equivalents and interim financing 38 086 68 541
All other operating items (20 887) (24 208)
Net cash provided by operating activities 75 076 106 768
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) -
Electric (26 927) (11 771)
Gas (6 150) (8 303)
Other (522) (80)
Allowance for borrowed funds used during
construction (600) (243)
Net cash used for investing activities (34 199) (20 397)
FINANCING ACTIVITIES
Sale of common shares 4 798 4 648
Payment of dividends (16 490) (16 156)
Payment of short-term borrowings (21 700) (71 975)
Long-term debt issue refunded (10 000) -
Sinking funds payments (1 825) (1 825)
Net cash used for financing activities (45 217) (85 308)
Net increase (decrease) in cash and cash equivalents (4 340) 1 063
Cash at beginning of period 7 722 6 007
Cash and cash equivalents at end of period $ 3 382 $ 7 070
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 20 884 $ 20 570
Income taxes $ 4 545 $ 5 180
See accompanying notes.
<PAGE 6>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) Accounting Policies
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's significant accounting policies are described in Note 1 of
Notes to Consolidated Financial Statements included in its 1994 Annual
Report on Form 10-K filed with the Securities and Exchange Commission. For
interim reporting purposes, the system 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.
Regulated subsidiaries of the System have 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, the
regulatory liabilities established by the system are required to be refunded
to customers over time. In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for 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 system 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 system 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 if changes are made in the
current regulatory framework or as competitive factors influence wholesale
and retail pricing in this industry. The principal regulatory assets
included in deferred charges at June 30, 1995 and December 31, 1994 were as
follows:
1995 1994
(Dollars in Thousands)
Purchased power contract buy-out $ 25 539 $ -
Fuel charge stabilization 23 503 16 638
Postretirement benefit costs including pensions 23 354 20 129
Yankee Atomic unrecovered plant and
decommissioning costs 16 168 18 368
Seabrook related costs 11 095 12 648
Deferred income taxes 9 626 5 537
FERC Order 636 transition costs 7 205 19 201
Pilgrim nuclear plant litigation costs 6 822 7 001
Cannon Street generating plant abandonment, net 4 400 4 400
Conservation and load management costs 3 394 3 773
Other 4 566 4 042
Total regulatory assets $135 672 $111 737
<PAGE 7>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
The regulatory liabilities, reflected in the accompanying balance sheets
and principally related to deferred income taxes, were $26.5 million and
$17.3 million at June 30, 1995 and December 31, 1994, respectively.
Generally, expenses which relate to more than one interim period are
allocated to other periods to more appropriately match revenues and
expenses. Principal items of expense which are allocated other than on the
basis of passage of time are depreciation and property taxes of the gas
subsidiary, Commonwealth Gas Company (Commonwealth Gas). These expenses are
recorded for interim reporting purposes based upon projected gas revenue.
Income tax expense is recorded using the statutory rates in effect applied
to book income subject to tax for each interim period.
The unaudited financial statements for the periods ended June 30, 1995
and 1994, reflect, in the opinion of the System, all adjustments 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
presentation 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
consumption of energy and Commonwealth Gas' seasonal rate structure.
(2) Commitments and Contingencies
(a) Construction
The system is engaged in a continuous construction program presently
estimated at $357.4 million for the five-year period 1995 through 1999. Of
that amount, $87.7 million is estimated for 1995. The program is subject to
periodic review and revision.
(b) Decommissioning of Nuclear Power Plants
The system, through Canal Electric Company (Canal), has a 3.52% joint-
ownership interest in the Seabrook nuclear power plant. Canal and the other
joint owners have established a decommissioning fund to cover post
operational decommissioning costs. The estimated cost to decommission the
plant is $386 million. Canal's share of this liability (approximately $13.6
million), less its share of the market value of the decommissioning trust
(approximately $1.2 million), is approximately $12.4 million.
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
and decommission the Yankee Nuclear Power Station (the plant). At June 30,
1995, Cambridge Electric Light Company's (Cambridge Electric) and Common-
wealth Electric Company's respective 2% and 2.5% investment in Yankee Atomic
was approximately $1.1 million. The most recent cost estimate to perm-
anently shut down the plant is approximately $359 million. The companies'
share of this liability is $16.2 million and is currently reflected in the
accompanying consolidated balance sheets as a liability and corresponding
regulatory asset.
<PAGE 8>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
Other Nuclear Plants
Cambridge Electric also has equity ownership interests ranging from 2.5%
to 4.5% in three operating nuclear generating facilities located in New
England with contract expiration dates ranging from 2007 to 2012. Cambridge
Electric is obligated to pay its proportionate share of the capacity and
energy costs associated with these units, which include depreciation,
operations and maintenance, a return on invested capital and the estimated
cost of decommissioning the plants at the end of their estimated service
lives. Cambridge Electric's estimated total decommissioning cost and
associated market value share of decommissioning trust assets for these
units is approximately $36 million and $13.3 million, respectively.
(c) Maine Yankee Nuclear Power Plant
One of the operating nuclear generating facilities that Cambridge
Electric has an equity ownership interest in, the Maine Yankee Nuclear Power
Plant, operated by Maine Yankee Atomic Power Company (Maine Yankee), has
been experiencing degradation of its steam generator tubes, principally in
the form of circumferential cracking, which until early 1995 was believed to
be limited to a relatively small number of tubes. During a refueling and
maintenance outage that began in early February 1995, Maine Yankee, through
the use of new inspection methods, detected increased degradation involving
approximately 60% of the tubes which was well beyond Maine Yankee's
expectations.
After carefully evaluating alternative courses of action to remedy this
situation, Maine Yankee announced in late May that it will begin repairs by
sleeving all 17,000 steam generator tubes. This repair technique is a
proven safe and technologically sound option commonly used in plants
throughout the United States and the world. The repairs are estimated to
cost approximately $40 million including Cambridge Electric's share of $1.6
million. Repairs began in June and are expected to be completed by the end
of this year.
(d) FERC Order No. 636
In May 1995, the DPU allowed Commonwealth Gas to accelerate recovery of
its FERC Order No. 636 transition costs that were incurred to date. These
costs had been deferred and accumulated as a regulatory asset and were being
recovered through the cost of gas adjustment (CGA) over a four-year period
that began in November 1993. The costs are now being recovered through the
CGA over a one-year period that began May 1, 1995. The accelerated recovery
period was permitted by the DPU due to the minimal impact on customers'
bills. Any further transition costs will be recovered by Commonwealth Gas
through the CGA as incurred. At June 30, 1995, a regulatory asset totaling
$7.2 million was reflected in deferred charges. In addition, a related
liability of $7.2 million was reflected in deferred credits.
<PAGE 9>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
Capital resources of the System and its subsidiaries are derived
principally from retained earnings and equity funds provided through the
System's Dividend Reinvestment and Common Share Purchase Plan (DRP).
Supplemental interim funds are borrowed on a short-term basis and, when
necessary, replaced with new equity and/or debt issues through permanent
financing secured on an individual company basis. The system purchases 100%
of all subsidiary common stock issues and provides, to the extent possible,
a portion of the subsidiaries' short-term financing needs. These capital
resources provide the funds required for the subsidiary companies'
construction programs, current operations, debt service and other capital
requirements.
For the first six months of 1995, cash flows from operating activities
amounted to approximately $75.1 million and reflect net income of $27.4
million and noncash items such as depreciation ($25 million), amortization
($6 million) and deferred income taxes (net of investment tax credits) which
amounted to ($577,000). The change in working capital since December 31,
1994, exclusive of cash, cash equivalents and interim financing, amounted to
$38.1 million and had a significant positive impact on cash flows from
operating activities, reflecting lower levels of unbilled revenues ($21.3
million), accounts receivable ($9.9 million), inventories ($8.1 million) and
prepaid taxes and other ($8.2 million), offset, in part, by lower levels of
accrued taxes and accounts payable of $5.7 million and $4.1 million,
respectively. In addition, the change in all other operating items for the
current six months includes $25.5 million relating to Commonwealth Electric
Company's (Commonwealth Electric) power contract buy-out with an independent
power producer. This amount was paid in April 1995 and will be recovered
with carrying charges over a seven-year period that began in April 1995.
Construction expenditures for the first six months of 1995 were
approximately $34.2 million, including an allowance for funds used during
construction and nuclear fuel. Construction expenditures, preferred and
common dividend requirements of the System ($16.5 million), the payment of
short-term borrowings ($21.7 million) and the refunding of long-term debt
($10 million) were funded almost entirely with internally generated funds.
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.
<PAGE 10>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
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, 1995 and 1994 and unit sales for these periods is shown
below:
Three Months Six Months
Ended June 30, Ended June 30,
1995 and 1994 1995 and 1994
Increase (Decrease)
(Dollars in Thousands)
Operating Revenues -
Electric $(10 354) (7.0)% $(30 084) (9.4)%
Gas 4 315 6.9 (23 256) (11.7)
Steam and other 500 16.5 119 1.3
(5 539) (2.6) (53 221) (10.1)
Operating Expenses -
Fuel and purchased power (3 639) (4.6) (18 552) (10.2)
Cost of gas sold 2 904 8.0 (17 367) (16.1)
Other operation and maintenance (2 374) (3.6) (3 206) (2.5)
Depreciation 894 8.6 1 756 7.6
Taxes -
Local property and other 148 2.6 623 4.6
Federal and state income (5 825) (326.3) (10 703) (54.8)
(7 892) (4.0) (47 449) (10.0)
Operating Income 2 353 16.6 (5 772) (11.0)
Other Income 986 498.0 2 279 282.1
Income Before Interest Charges 3 339 23.2 (3 493) (6.6)
Interest Charges 669 6.3 855 4.0
Net Income 2 670 71.0 (4 348) (13.7)
Dividends on preferred shares (15) (5.1) (30) (5.1)
Earnings Applicable to Common Shares $ 2 685 77.5 $ (4 318) (13.9)
Unit Sales
Electric - Megawatthours (MWH)
Retail 24 675 2.3 (21 283) (0.9)
Wholesale (784 701) (74.8) (1 563 449) (70.4)
(760 026) (35.9) (1 584 732) (35.4)
Gas - Billions of British Thermal
Units (BBTU)
Firm 427 7.3 (2 545) (10.2)
Interruptible and other (324) (14.8) 1 497 65.7
103 1.3 (1 048) (3.9)
<PAGE 11>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
The following is a summary of electric and gas unit sales for the three
and six-month periods ended June 30, 1995 and 1994:
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Electric Sales - MWH
Residential 392 619 386 628 850 110 891 517
Commercial 590 913 573 519 1 177 610 1 158 728
Industrial 105 941 104 840 202 250 201 397
Other 5 127 4 938 11 685 11 296
Total retail sales 1 094 600 1 069 925 2 241 655 2 262 938
Wholesale to other systems 263 853 1 048 554 656 310 2 219 759
Total 1 358 453 2 118 479 2 897 965 4 482 697
Gas Sales - BBTU
Residential 3 459 3 238 12 863 14 361
Commercial 1 731 1 584 6 163 6 921
Industrial 765 711 2 239 2 394
Other 299 294 1 100 1 234
Total firm sales 6 254 5 827 22 365 24 910
Off-system sales 967 - 2 380 -
Quasi-firm sales 520 - 870 -
Interruptible sales 374 2 185 527 2 280
Total 8 115 8 012 26 142 27 190
Electric Operating Revenues, Fuel and Purchased Power Costs
For the second quarter and first six months of 1995, electric operating
revenues decreased approximately $10.4 million and $30.1 million, respec-
tively, from the corresponding periods in 1994 due primarily to declines of
$13.4 million and $29.8 million in wholesale sales. However, fluctuations
in the level of wholesale sales have little, if any, impact on net income.
During the current six-month period, the decrease in operating revenues also
reflected a 4.6% decline in retail unit sales to residential customers
reflecting the extremely mild weather conditions during the first quarter of
1995 compared to the record cold experienced during the same period in 1994.
Unit sales to commercial and industrial customers changed marginally from
the first half of 1994 since these customer sectors draw less energy for
heating. During the current quarter, retail unit sales increased 2.3% as
sales to all customer classes increased, partially offsetting the revenue
decline caused by the lower wholesale sales.
In addition, the current three and six-month periods include reductions
in fuel and purchased power costs of $3.6 million and $18.6 million,
respectively, due mainly to a lower level of fuel oil costs at Canal
Electric Company's (Canal) Unit 1 that reflected an annual inspection and
unscheduled turbine maintenance. Also contributing to this decrease was the
reduced availability of Canal Unit 2 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 that began in early
1995. Slightly offsetting these reduced power sources was greater
generation from Seabrook and an increase in power purchases from several
<PAGE 12>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
other non-utility generators. During the first quarter of 1995, Common-
wealth Electric successfully terminated a long-term power contract with
another IPP through a buy-out arrangement which will reduce future power
costs.
Commonwealth Electric and Cambridge Electric Light Company (Cambridge
Electric) have also received approval from the Massachusetts Department of
Public Utilities (DPU) to recover in revenues certain 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. For the current six-month period, this item declined $1.3 million
and $333,000 for Commonwealth Electric and Cambridge Electric, respectively.
Historically, revenues collected through base rates have been designed
to reimburse Commonwealth Electric and Cambridge Electric 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-mandated recovery mechanism
for capacity-related costs associated with certain long-term purchased power
contracts, Commonwealth Electric and Cambridge Electric experience a revenue
excess or shortfall when unit sales and/or the costs recoverable in base
rates vary from test-period levels. This issue, which has had a significant
impact on net income, was addressed in settlement agreements approved by the
DPU in May 1995. (Refer to the "Rate Settlement Agreements" section for
additional details.) In the current three and six-month periods, in
accordance with the settlement agreements, approximately $1.7 million of
these capacity-related costs were deferred for future recovery. During the
current six-month period, the total undercollection of such capacity-related
costs was $969,000 compared to $838,000 in 1994 as a result of this recovery
mechanism. In the current three-month period, revenues included the
recovery of approximately $63,000 in excess of such capacity-related costs
compared to an undercollection of $942,000 in the same period for 1994. Net
income would have been reduced by approximately $1 million in both the
current three and six-month periods had the excess capacity-related costs
not been deferred pursuant to the settlement agreements.
Gas Operating Revenues and Cost of Gas Sold
Gas operating revenues decreased $23.3 million (11.7%) during the first
half of 1995 due mainly to a $17.4 million reduction in the cost of gas sold
that reflected lower firm unit sales and lower gas costs offset, in part, by
off-system and quasi-firm sales that began in 1994. Firm unit sales for the
current six-month period decreased 10.2% reflecting declines to residential
(10.4%), commercial (11%) and industrial (6.5%) customers due to the mild
weather conditions experienced during the first quarter of 1995 compared to
the record cold temperatures experienced for the same quarter of 1994 off-
set, in part, by higher firm unit sales in all customer segments during the
current quarter. For the first half of 1995, heating degree days totaled
3,806 compared to 4,242 for the same period in 1994, a decrease of 10.3%.
<PAGE 13>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
Other Operating Expenses
Other operation and maintenance decreased during the current quarter and
first half of 1995 by 3.6% and 2.5%, respectively, due to lower C&LM costs
($1.3 million), a decline in the provision for bad debts reflecting improved
collection experience ($555,000) and continued cost containment efforts
offset, in part, by higher labor and benefit costs ($3.3 million) and
increased maintenance costs relative to Canal Unit 1 ($2.2 million). The
higher level of benefit costs reflects the full recognition of expenses
relating to postretirement benefits other than pensions and the amortization
of previously deferred postretirement benefits costs. (Refer to the "Rate
Settlement Agreements" section for additional details.)
Depreciation expense increased in both current periods due to a higher
level of depreciable plant and, to a lesser degree, an adjustment to
depreciation rates related to Canal Unit 1 during the second quarter. Local
property and other taxes increased 2.6% and 4.6% in the current three and
six-month periods due mainly to higher rates and assessments. The decrease
in federal and state income taxes during the current periods reflects a
significantly lower level of taxable income as well as an adjustment made in
conjunction with the aforementioned settlement agreements.
Other Income and Interest Charges
Other income for the current three and six-month periods increased
approximately $986,000 and $2.3 million, respectively, due primarily a
higher level of interest income related to Commonwealth Electric's fuel
charge stabilization deferral ($759,000) and carrying costs on the buy-out
of a power contract ($684,000) with an independent power producer. The cost
of the buy-out is being recovered from customers over a seven-year period.
Other income for the current six-month period also reflects the partial
reversal of a reserve related to certain costs associated with Commonwealth
Electric's energy conservation program ($1.4 million), the recovery of which
has since been approved by the DPU.
Total interest charges for the current quarter and first six months of
1995 increased 6.3% and 4% due primarily to a higher level of interest on
deferred gas costs ($995,000) offset, in part, by an increase in the debt
component of allowance for funds used during construction ($357,000).
Power Contract Arbitration
On June 7, 1995, a three-member panel of arbitrators upheld the
termination by Commonwealth Electric and Cambridge Electric (the Companies)
of power contracts with Eastern Energy Corporation (Eastern), the developer
of a proposed 300 MW coal-fired plant. In June 1989, the Companies 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.
However, in May 1994, the Companies gave notice of termination of their
power contracts with Eastern based upon its failure to meet the permitting,
construction or operation milestones established by the contracts, obtain
the required permits, commence construction or sell any additional power
from the proposed plant. Efforts to reshape the power contracts to provide
<PAGE 14>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
a satisfactory arrangement were unsuccessful. In a letter dated June 30,
1994, Eastern objected to the notices of termination and invoked arbitration
seeking $52 million from the Companies. The panel's decision is binding and
prevents Eastern from further litigating or contesting the termination of
the contracts in any other forum. This action is expected to save the
Companies' customers approximately $100 million over the next ten years and
as much as $225 million over twenty years.
Regulatory Matters
Rate Settlement Agreements
In May 1995, the DPU approved settlement proposals sponsored jointly by
Commonwealth Electric, Cambridge Electric and the Attorney General of
Massachusetts which resolved issues related to cost of service, rates,
accounting matters and generating unit performance reviews. Commonwealth
Electric's agreement:
(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 refunded in May 1995 to
Commonwealth Electric by Canal. Further, the settlement imposes a
moratorium on retail rate filings until October 1998;
(2) limits Commonwealth Electric'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 Commonwealth Electric's current fuel charge stabilization
mechanism to include deferral (without carrying charges) of certain
long-term purchased power and transmission capacity costs within
the original limits established for the fuel charge stabilization
deferral ($16 million in any given calendar year and $40 million
over the life of the mechanism);
(5) requires Commonwealth Electric to fully expense costs relating to
postretirement benefits other than pensions in accordance with
Statement of Financial Accounting Standards No. 106 and amortize
the current deferred balance of $8.6 million over a ten-year
period;
(6) provides eligible Economic Development Rate customers with a
discount of up to 30% but also requires these customers to provide
Commonwealth Electric with a five-year notice if they intend to
self-generate or acquire electricity from another provider; and
(7) prohibits Commonwealth Electric from seeking recovery of the costs
incurred in realizing costs savings through a 1993 work force
reduction and restructuring, totaling approximately $3 million.
<PAGE 15>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
Cambridge Electric's agreement:
(1) implements a $1.5 million refund to Cambridge Electric's customers
through the Fuel Charge during the third and fourth quarters of
1995 including its share of excess deferred tax reserves related to
Seabrook Unit No. 1 refunded in May 1995 to Cambridge Electric by
Canal;
(2) allows Cambridge Electric to defer certain long-term purchased
power and transmission capacity costs in excess of the amount of
such capacity costs currently included in Cambridge Electric's base
rates up to an annual amount of $2 million for recovery in its next
general retail base rate case;
(3) prohibits Cambridge Electric from seeking recovery of costs it
incurred in obtaining costs savings by work force reduction and
restructuring, totaling approximately $400,000; and
(4) includes the DPU's withdrawal of all related requests, appeals,
motions or other issues raised by parties regarding certain
generating unit performance reviews.
The system's management is encouraged by the support provided through
the Office of the Attorney General and believes that these settlements will
eliminate the need for potentially costly litigation and regulatory
proceedings and, by moderating rate impacts and enabling the system to
remain competitive in a changing environment, are in the best interest of
the system and its customers.
Rate Tariff Filing
In March 1995, Cambridge Electric filed four rate tariffs with the DPU
to establish rates for its largest customers should they decide to generate
their own power or purchase from another source while remaining in
Cambridge. In an effort to protect its other customers from increased
costs, Cambridge Electric has requested that these large customers pay their
share of the costs that were incurred on their behalf to ensure that their
energy needs will be met at all times. These costs include long-term power
contracts entered into to meet projected energy requirements, investments
in substations, underground and overhead lines and current and future
decommissioning costs associated with nuclear plants. A ruling is expected
from the DPU in 1995.
Environmental Matters
Commonwealth Gas is participating in the assessment of a number of
former manufactured gas plant (MGP) sites and alleged MGP waste disposal
locations to determine if and to what extent such sites have been
contaminated and whether Commonwealth Gas may be responsible for remedial
actions. Commonwealth Gas is also involved in certain other known or
potentially contaminated sites where the associated costs may not be
recoverable in rates. There were no significant new developments that
occurred during the first half of 1995. For further information on these
matters, refer to the System's 1994 Annual Report on Form 10-K.
<PAGE 16>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The System is subject to legal claims and matters arising from its
course of business, including its participation in a power contract
arbitration proceeding involving the recovery of excess fuel charges
billed to Commonwealth Electric Company for power purchases with
Dartmouth Power Associates Limited Partnership. Also, Commonwealth
Electric's and Cambridge Electric Light Company's decision to cancel
power contracts with Eastern Energy Corporation was upheld by a
binding arbitration panel decision in June 1995 (refer to "Power
Contract Arbitration" in Part I, Item 2 - "Management's Discussion and
Analysis of Results of Operations" section of this report).
Item 2. Changes in the Rights of the Company's Security Holders
None
Item 3. Defaults by the Company on its Senior Securities
None
Item 4. Results of Votes of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10 - Material Contracts
10.1.43.1 System Power Sales Agreement by and between The Connecticut Light
and Power Co., Western Massachusetts Electric Co., and Public
Service Company of New Hampshire, as sellers, and Commonwealth
Electric Company, as buyer, of power for peaking capacity and
related energy, dated January 13, 1995, as effective June 1, 1995
and extending to October 31, 2000 (Filed as Exhibit 2 to
Commonwealth Electric Company's Form 10-Q (June 1995), File 2-7749.)
10.1.54.3 First Amendment, dated November 7, 1994, to Power Sale Agreement by
and between Commonwealth Electric Company and Altresco Pittsfield,
L.P. dated February 20, 1992 (Filed as Exhibit 3 to Commonwealth
Electric Company's Form 10-Q (June 1995), File 2-7749.)
10.1.54.4 First Amendment, dated November 7, 1994, to Power Sale Agreement by
and between Cambridge Electric Light Company and Altresco Pitts-
field, L.P. dated February 20, 1992 (Filed as Exhibit 2 to Cambridge
Electric Light Company's Form 10-Q (June 1995), File 2-7909.)
<PAGE 17>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
10.1.51.1 Second Amendment, dated June 23, 1994, to Power Purchase Agreement
by and between Commonwealth Electric Company and Dartmouth Power
Associates, L.P. dated September 5, 1989 (Filed as Exhibit 4 to
Commonwealth Electric Company's Form 10-Q (June 1995), File 2-7749.)
Exhibit 27 - Financial Data Schedule
Filed herewith as Exhibit 1 is the Financial Data Schedule for the
six months ended June 30, 1995.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
June 30, 1995.
<PAGE 18>
COMMONWEALTH ENERGY SYSTEM
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 ENERGY SYSTEM
(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 14, 1995
<TABLE> <S> <C>
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<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 Energy System for the six months ended June 30, 1995
and is qualified in its entirety by reference to such financial statements.
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