<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 September 30, 1996
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
(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 November 1, 1996
Common Shares of Beneficial
Interest, $2 par value 21,529,676 shares
<PAGE>
<PAGE 2>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
ASSETS
(Dollars in thousands)
September 30, December 31,
1996 1995
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost
Electric $1 132 348 $1 105 502
Gas 352 903 346 990
Other 63 395 63 132
1 548 646 1 515 624
Less - Accumulated depreciation and
amortization 529 930 497 627
1 018 716 1 017 997
Add - Construction work in progress
and nuclear fuel in process 8 500 10 276
1 027 216 1 028 273
LEASED PROPERTY, net 14 211 14 931
EQUITY IN CORPORATE JOINT VENTURES
Nuclear electric power companies (2.5%
to 4.5%) 10 149 9 814
Other investments 3 449 3 400
13 598 13 214
CURRENT ASSETS
Cash 5 843 4 319
Accounts receivable 80 894 105 377
Unbilled revenues 16 721 31 642
Inventories, at average cost 33 165 25 538
Prepaid taxes and other 20 362 15 843
156 985 182 719
DEFERRED CHARGES 147 393 150 964
$1 359 403 $1 390 101
See accompanying notes.
<PAGE>
<PAGE 3>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
September 30, December 31,
1996 1995
(Unaudited)
CAPITALIZATION
Common share investment -
Common shares, $2 par value -
Authorized - 50,000,000 shares
Outstanding - 21,529,676 in 1996 and
21,528,268 in 1995 $ 43 059 $ 43 056
Amounts paid in excess of par value 111 685 111 749
Retained earnings 256 046 235 980
410 790 390 785
Redeemable preferred shares, less current
sinking fund requirements 13 020 13 840
Long-term debt, including premiums, less current
sinking fund requirements and maturing debt 361 446 377 181
785 256 781 806
CAPITAL LEASE OBLIGATIONS 12 618 13 291
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 78 825 55 600
Maturing long-term debt 24 260 33 230
103 085 88 830
Other Current Liabilities -
Current sinking fund requirements 8 473 9 103
Accounts payable 92 509 134 908
Accrued taxes 29 389 31 587
Other 34 563 35 407
164 934 211 005
268 019 299 835
DEFERRED CREDITS
Accumulated deferred income taxes 172 663 170 182
Unamortized investment tax credits
and other 120 847 124 987
293 510 295 169
COMMITMENTS AND CONTINGENCIES
$1 359 403 $1 390 101
See accompanying notes.
<PAGE>
<PAGE 4>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
1996 1995 1996 1995
OPERATING REVENUES
Electric $176 113 $162 778 $495 066 $453 324
Gas 48 761 41 393 240 517 216 443
Steam and other 2 459 2 638 13 556 11 910
227 333 206 809 749 139 681 677
OPERATING EXPENSES
Fuel and purchased power 94 245 85 506 271 014 248 973
Cost of gas sold 30 334 24 013 130 140 114 568
Other operation and maintenance 63 269 59 708 189 437 184 399
Depreciation 11 340 10 800 37 851 35 795
Taxes -
Federal and state income 4 788 3 955 27 676 12 772
Local property and other 5 332 5 307 19 719 19 534
209 308 189 288 675 837 616 041
OPERATING INCOME 18 025 17 521 73 302 65 636
OTHER INCOME 813 424 4 021 1 960
INCOME BEFORE INTEREST CHARGES 18 838 17 945 77 323 67 596
INTEREST CHARGES
Long-term debt 8 809 9 527 27 039 29 098
Other interest charges 1 724 1 675 4 790 4 992
Allowance for borrowed funds
used during construction (55) (373) (236) (973)
10 478 10 829 31 593 33 117
NET INCOME 8 360 7 116 45 730 34 479
Dividends on preferred shares 263 279 797 843
EARNINGS APPLICABLE TO
COMMON SHARES $ 8 097 $ 6 837 $ 44 933 $ 33 636
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (a) 21 529 676 21 373 800 21 529 676 21 252 018
EARNINGS PER COMMON SHARE (a) $ .37 $ .32 $2.08 $1.58
DIVIDENDS DECLARED PER
COMMON SHARE (a) $.385 $.375 $1.155 $1.125
(a) Prior period amounts have been restated to reflect a two-for-one stock
split that became effective June 5, 1996.
See accompanying notes.
<PAGE>
<PAGE 5>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Dollars in thousands)
(Unaudited)
1996 1995
OPERATING ACTIVITIES
Net income $ 45 730 $ 34 479
Effects of noncash items -
Depreciation and amortization 46 748 45 308
Deferred income taxes and investment
tax credits, net (1 618) (752)
Earnings from corporate joint ventures (1 333) (1 208)
Dividends from corporate joint ventures 949 1 134
Change in working capital, exclusive of cash
and interim financing (18 813) 41 124
All other operating items (6 956) (14 855)
Net cash provided by operating activities 64 707 105 230
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) -
Electric (27 707) (42 898)
Gas (6 316) (10 456)
Other (992) (2 660)
Allowance for borrowed funds used during
construction (236) (973)
Net cash used for investing activities (35 251) (56 987)
FINANCING ACTIVITIES
Sale of common shares 32 7 197
Payment of dividends (25 664) (24 801)
Proceeds from (payment of) short-term borrowings 23 225 (22 175)
Long-term debt issues refunded (23 230) (10 000)
Sinking funds payments (2 295) (2 576)
Net cash used for financing activities (27 932) (52 355)
Net increase (decrease) in cash 1 524 (4 112)
Cash at beginning of period 4 319 7 722
Cash at end of period $ 5 843 $ 3 610
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 30 885 $ 30 578
Income taxes $ 10 110 $ 12 357
See accompanying notes.
<PAGE>
<PAGE 6>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) General Information
Commonwealth Energy System, the parent company, is referred to in this
report as the "System" and, together with its subsidiaries, is collec-
tively referred to as "the system." The System is an exempt public
utility holding company under the provisions of the Public Utility Holding
Company Act of 1935 with investments in four operating public utility
companies located in central, eastern and southeastern Massachusetts. In
addition, the System has interests in other utility and several non-
regulated companies.
The system has 2,009 regular employees including 1,191 (59%)
represented by various collective bargaining units. On September 8, 1996,
a contract was ratified resolving a labor dispute with a collective
bargaining unit that represents approximately 17% of regular employees.
The agreement that covered this bargaining unit expired on March 31, 1996.
Work performed by these employees had been disrupted since that time and
essential tasks were completed by management personnel and external
contractors. Employees represented by the bargaining unit returned to
work on September 22, 1996. The new six-year agreement will expire on
March 31, 2002. New agreements were reached earlier this year with two
other bargaining units (representing approximately 23% of regular
employees) that were scheduled to expire on October 1, 1996 and November
1, 1997. These new agreements will remain in effect until 2002 and 2001,
respectively.
(2) Significant Accounting Policies
(a) Principles of Accounting
The system's significant accounting policies are described in Note 1
of Notes to Consolidated Financial Statements included in its 1995 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.
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 September 30,
1996 and 1995, reflect, in the opinion of the System, all adjustments
(consisting of only normal recurring accruals) necessary to summarize
fairly the results for such periods. In addition, certain prior period
<PAGE>
<PAGE 7>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
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.
(b) Regulatory Assets and Liabilities
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.
Based on the current regulatory framework, the system accounts for the
economic effects of regulation in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." On January 1, 1996, the
system adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 imposes
stricter criteria for regulatory assets by requiring that such assets be
probable of future recovery at each balance sheet date. As of September
30, 1996, SFAS No. 121 did not have an impact on the system's financial
position or results of operations. However, this result may change as
modifications are made in the current regulatory framework pursuant to
electric utility restructuring orders issued by the DPU including a final
order that is expected to be issued by the end of 1996. For additional
discussion of electric industry restructuring activities, see "Electric
Industry Restructuring" in Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 2 of this report.
The principal regulatory assets included in deferred charges were as
follows:
September 30, December 31,
1996 1995
(Dollars in thousands)
Postretirement benefit costs including
pensions $ 22 481 $ 24 608
Power contract buy-out 21 718 23 838
Fuel charge stabilization 18 562 22 063
Deferred income taxes 14 229 14 106
FERC Order 636 transition costs 10 141 11 711
Yankee Atomic unrecovered plant
and decommissioning costs 8 463 10 135
Seabrook related costs 7 075 9 511
Other 15 982 14 700
$118 651 $130 672
<PAGE>
<PAGE 8>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
The principal regulatory liabilities, reflected in the accompanying
condensed balance sheets and related to deferred income taxes, were $18.2
million and $20.6 million at September 30, 1996 and December 31, 1995,
respectively.
(3) Commitments and Contingencies
(a) Construction Program
The system is engaged in a continuous construction program presently
estimated at $293 million for the five-year period 1996 through 2000. Of
that amount, $69.3 million is estimated for 1996. The program is subject
to periodic review and revision.
(b) Connecticut Yankee Atomic Power Company Outage
On July 22, 1996, Connecticut Yankee Atomic Power Company (Connecticut
Yankee), which operates the Connecticut Yankee nuclear power plant (the
plant), took the unit out of service in connection with certain safety-
related issues and refueling. While the plant has been out of service,
Connecticut Yankee's owners have evaluated the economics of continuing to
operate the plant over the remaining ten years of its current license
life, compared to the costs of closing the plant and incurring replacement
power for the same period. As a result of this evaluation, on October 9,
1996, Connecticut Yankee announced that a permanent shutdown of the plant
seems likely. Connecticut Yankee's Board of Directors is expected to vote
sometime during the fourth quarter of 1996 on whether to permanently shut
down the plant.
Cambridge Electric has an equity ownership interest in Connecticut
Yankee of 4.5% which, at September 30, 1996, amounted to approximately
$4.8 million. Cambridge Electric, through its ownership interest, has a
corresponding capacity entitlement and power purchase obligation.
The preliminary estimate of the sum of future payments for the
closing, decommissioning and recovery of the remaining investment in the
plant, assuming permanent shutdown, is approximately $797 million.
Cambridge Electric's share of these remaining estimated costs is
approximately $36 million. Based upon regulatory precedent, Connecticut
Yankee believes that it would continue to collect from its power
purchasers (including Cambridge Electric) its decommissioning costs,
unrecovered plant investment and other costs associated with the permanent
closure of the plant over the remaining period of the plant's operating
license that expires in 2007. Cambridge Electric does not believe the
ultimate outcome of the early closing of this plant would have a material
adverse effect on its operations and believes that recovery of these FERC-
approved costs would continue to be allowed in its rates at the retail
level.
(4) Common Shares
On June 5, 1996, the System effected a two-for-one stock split of its
outstanding common shares which was proposed by the System's Board of
Trustees on March 28, 1996 and subsequently approved by the System's
<PAGE>
<PAGE 9>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
shareholders on May 2, 1996. The record date for the stock split was May
15, 1996. The split resulted in the issuance of an additional 10.8
million common shares and accompanied an increase in the number of
authorized common shares from 18 million to 50 million and a change in the
par value from four dollars to two dollars per common share. Prior period
amounts for the average number of common shares outstanding, earnings per
common share, dividends declared per common share and common share
investment information in the accompanying condensed financial statements
have been restated to reflect the stock split.<PAGE>
<PAGE 10>
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).
However, effective February 1, 1996, the System's DRP common share
requirement is being fulfilled through open market purchases rather than
the direct issue of common shares. This change was prompted by the
System's improving financial condition and reduced need for equity
capital. 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.
During the first nine months of 1996, cash flows from operating
activities amounted to approximately $65 million and reflect net income of
$45.7 million and noncash items including depreciation of $38.3 million
and $8.5 million in amortization and deferred income taxes. Working
capital since December 31, 1995, exclusive of cash and interim financing,
increased $18.8 million reflecting lower levels of accounts payable ($42.4
million) and accrued taxes ($2.2 million) and higher levels of materials
and supplies ($7.7 million) and prepaid taxes ($5.4 million) offset, in
part, by decreases in unbilled revenues ($14.9 million) and accounts
receivable ($24.5 million).
Construction expenditures for the first nine months of 1996 were
approximately $35.3 million, including an allowance for funds used during
construction (AFUDC) and nuclear fuel. Construction expenditures,
preferred and common dividend requirements of the System ($25.7 million)
and the refunding of long-term debt ($23.2 million) were funded primarily
with internally-generated funds. Proceeds from short-term borrowings of
$23.2 million helped to meet the cash requirements for the current nine-
month period.
Results of Operations
The following is a discussion of certain significant factors that 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>
<PAGE 11>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
A summary of the period to period changes in the principal items
included in the accompanying condensed statements of income for the three
and nine-month periods ended September 30, 1996 and 1995 and unit sales
for these periods is shown below:
Three Months Nine Months
Ended September 30, Ended September 30,
1996 and 1995 1996 and 1995
Increase (Decrease)
(Dollars in thousands)
Operating Revenues -
Electric $13 335 8.2% $41 742 9.2%
Gas 7 368 17.8 24 074 11.1
Steam and other (179) (6.8) 1 646 13.8
20 524 9.9 67 462 9.9
Operating Expenses -
Fuel and purchased power 8 740 10.2 22 041 8.9
Cost of gas sold 6 321 26.3 15 572 13.6
Other operation and maintenance 3 561 6.0 5 038 2.7
Depreciation 540 5.0 2 056 5.7
Taxes -
Federal and state income 820 20.7 14 904 116.7
Local property and other 25 0.5 185 0.9
20 007 10.6 59 796 9.7
Operating Income 517 3.0 7 666 11.7
Other Income 376 88.7 2 061 105.2
Income Before Interest Charges 893 5.0 9 727 14.4
Interest Charges (351) (3.2) (1 524) (4.6)
Net Income 1 244 17.5 11 251 32.6
Dividends on preferred shares (16) (5.7) (46) (5.5)
Earnings Applicable to Common Shares$ 1 260 18.4 $ 11 297 33.6
Unit Sales
Electric - Megawatthours (MWH)
Retail (27 780) (2.2) 29 035 0.8
Wholesale 162 206 25.1 841 346 64.6
134 426 7.0 870 381 18.1
Gas - Billions of British Thermal
Units (BBTU)
Firm 328 9.7 3 059 11.9
Interruptible and other (294) (16.1) (1 740) (31.1)
34 0.7 1 319 4.2
<PAGE>
<PAGE 12>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
The following is a summary of electric and gas unit sales for the three
and nine-month periods ended September 30, 1996 and 1995:
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Electric Sales - MWH
Residential 462 966 471 063 1 366 705 1 321 173
Commercial 663 155 685 905 1 843 041 1 863 515
Industrial 111 410 108 621 314 686 310 871
Other 5 566 5 288 17 135 16 973
Total retail sales 1 243 097 1 270 877 3 541 567 3 512 532
Wholesale 808 830 646 624 2 144 280 1 302 934
Total sales 2 051 927 1 917 501 5 685 847 4 815 466
Gas Sales - BBTU
Residential 1 713 1 444 15 856 14 307
Commercial 1 108 1 044 8 180 7 207
Industrial 717 746 3 248 2 985
Other 177 153 1 527 1 253
Total firm sales 3 715 3 387 28 811 25 752
Off-system 723 976 1 676 3 356
Quasi-firm 307 579 792 1 449
Interruptible 498 267 1 391 794
Total sales 5 243 5 209 32 670 31 351
Transportation 1 873 935 3 432 2 883
Total 7 116 6 144 36 102 34 234
Electric Operating Revenues, Fuel and Purchased Power Costs
Electric operating revenues increased $13.3 million (8.2%) and $41.7
million (9.2%) during the current quarter and first nine months of 1996
due, in part, to higher total unit sales reflecting increases of 7% and
18.1%, respectively. The majority of these increases were attributable to
the wholesale sector (representing $4.7 million and $32.9 million during
the current three and nine-month periods, respectively) and reflect the
increased availability of Canal Electric's Unit 1 generating facility which
was out of service during the first seven months of 1995 for scheduled
maintenance and repairs. The increase was also due to the changing
capacity needs of non-affiliated utilities and NEPOOL. Changes in
wholesale electric sales have little, if any, impact on net income. Also
affecting revenues for both periods was a $4 million refund received during
the current quarter associated with a power contract settlement agreement
approved by the Federal Energy Regulatory Commission relative to billing
issues in prior years. The increase in revenues during the nine months was
also affected by the absence of a $7.5 million refund to customers during
the second quarter of 1995 that related to settlement agreements reached
with the DPU.
<PAGE>
<PAGE 13>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
Fuel and purchased power increased approximately $8.7 million (10.2%)
and $22 million (8.9%) during the current three and nine-month periods due
primarily to greater fuel costs at Canal Electric (a major supplier of
electricity to the system) resulting from the absence of scheduled
maintenance to Canal Unit 1 that occurred in 1995 and higher unit sales.
Gas Operating Revenues and Cost of Gas Sold
During the current quarter, gas operating revenues increased by $7.4
million (17.8%) due to higher gas prices, which led to an increase in the
cost of gas sold ($6.3 million), and higher firm and interruptible unit
sales offset, in part, by lower quasi-firm and off-system unit sales and
transportation volume and a decline in conservation and load management
(C&LM) charges ($865,000). Gas operating revenues for the first nine
months of 1996 increased approximately $24.1 million (11.1%) due to higher
gas prices, which contributed to an increase in the cost of gas sold, and
higher firm and interruptible unit sales. These increases were somewhat
offset by a decline in quasi-firm and off-system unit sales and a lower
level of C&LM costs ($2.1 million). Fluctuations in non-firm unit sales
during both the current quarter and first nine months of 1996 had no impact
on net income.
The increase in unit sales to firm customers during the first nine
months of 1996 (11.9%) reflects significant weather-related improvements
for all customer classes due to the colder than normal weather experienced
throughout the region, particularly during the first quarter, as compared
to milder weather last year. Heating degree days were nearly 10% higher
during the first nine months of 1996 as compared to the same period in
1995. A growing customer base, including customers formerly receiving
quasi-firm sales service, also contributed to the increase in firm unit
sales in both current periods.
The decreases in off-system and quasi-firm sales had no impact on net
income during the current quarter and first nine months of 1996. A portion
of the margin realized on these sales reduces the cost of gas sold to firm
customers and the remaining amount is deferred. In December 1995,
Commonwealth Gas filed a margin-sharing proposal with the DPU related to
the deferred margins on quasi-firm sales and a ruling has not yet been
issued by the DPU.
Other Operation and Maintenance
For the current quarter and first nine months of 1996, other operation
and maintenance increased approximately $3.6 million (6%) and $5 million
(2.7%), respectively, reflecting the net impact of a labor dispute
discussed in Note 1 of Notes to Condensed Financial Statements in Item 1 of
this report, higher postretirement benefit costs ($846,000 and $4.2
million, respectively), storm damage costs related to Hurricane Edouard
($1.9 million) and an increase in maintenance costs primarily associated
with Canal Unit 2 ($600,000 and $1 million, respectively). These increases
were partially offset in the three and nine-month periods by reductions in
<PAGE>
<PAGE 14>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
maintenance costs, primarily associated with Canal Unit 2 ($3.8 million and
$1.3 million, respectively), a decline in the provision for bad debts
($236,000 and $868,000, respectively) and, in the nine-month period, the
absence of legal fees ($810,000) associated with the cancellation of a
power contract in 1995.
Depreciation and Taxes
Depreciation expense increased $540,000 (5%) and $2.1 million (5.7%)
during the current three and nine-month periods due primarily to a higher
level of depreciable plant, particularly Canal Unit 1. Federal and state
income taxes increased significantly during the current periods due to a
greater level of pretax income and the impact of the aforementioned
settlement agreements with the DPU. Local property and other taxes were
virtually unchanged as compared to the same periods in 1995.
Other Income and Interest Charges
During the first nine months of 1996, other income increased $2.1
million as compared to the same period in 1995 due mainly to the recording
of a regulatory asset by Canal Electric for costs associated with
postretirement benefits that are now being recovered in wholesale rates
($1.8 million) and a gain recognized on the sale of a parcel of non-utility
land by Cambridge Electric ($664,000).
The decline in total interest charges for the current three and nine-
month periods reflects scheduled sinking fund payments and maturing long-
term debt.
Electric Industry Restructuring
On August 16, 1995, the DPU issued an order calling for the restructur-
ing of the electric utility industry in Massachusetts. The DPU's intent is
to reduce electric costs to consumers by providing customers with the
opportunity to choose their electric power provider while companies such as
the System's retail electric subsidiaries continue to provide transmission
and distribution services. On May 1, 1996, the DPU issued an order
containing proposed rules for implementing electric industry restructuring.
The proposed rules, which were the subject of public comment and
hearings during June and July 1996, provide for:
(1) the establishment of an independent system operator to operate the
regional transmission system;
(2) a power exchange to manage a competitive bidding pool for short-term
power sales;
(3) functional separation of electric companies into generation,
transmission and distribution corporate entities;
(4) preservation of discounts for low-income customers, shut-off
protections and provision of service to all customers;
(5) registration requirements for generation suppliers;
(6) options for phased incentives for electric companies to divest their
generation assets;
(7) promotion of environmental goals;
<PAGE>
<PAGE 15>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
(8) support for energy efficiency and renewable energy resources;
(9) a price cap system of incentive regulation for the remaining
distribution and transmission functions;
(10) unbundling of rates on bills into separate components of
transmission, distribution and energy, and implementation of a
competitive generation market by January 1, 1998; and
(11) a reasonable opportunity for recovery of stranded cost.
On August 9, 1996, the DPU issued an order delaying the issuance of
final rules until the end of 1996. The DPU also stated that it will issue
a revised schedule for electric companies to make company-specific
unbundled rate filings.
Although the DPU has not yet issued its revised rate filing schedule,
Commonwealth Electric Company and Cambridge Electric Light Company (the
Companies) anticipate filing their revenue-neutral, unbundled rates in
early 1997 after the issuance of the DPU's final rules. Also, during 1997,
the Companies will file their comprehensive restructuring plan. One
element of the Companies' plan (announced on February 15, 1996) calls for
the auctioning, in a competitive market, of their capacity entitlement
(1,140 MW) in all twenty-one power contracts in an effort to develop a
competitive market whereby customers would have the flexibility to choose
their electric supplier. These entitlements include contracts for power
from Canal Units 1 and 2 and Seabrook 1, which are owned or jointly owned
by the System's generating subsidiary Canal Electric Company. The
Companies' plan provides for total recovery of the difference between the
current market value of the Companies' power contracts and their
unavoidable costs. Under the Companies' plan, this difference, a component
of what is often referred to as stranded cost, would be recovered through a
non-bypassable access charge paid over an appropriate time period by all
customers in the Companies' service areas.
The DPU's May 1 order reaffirmed that one of its transition principles
is to seek near-term rate relief for electric customers. Also, the DPU's
proposed rules would limit the period for recovery of net, non-mitigable
stranded cost to a ten-year period (January 1, 1998 through December 31,
2007). Recovery of stranded cost depends upon the timing, nature, and
degree of competition that may result from future changes in regulatory
policies governing the Companies' activities and prices, as well as future
power costs and market prices of power. The Companies' single largest
component of stranded cost relates to their purchased power contracts with
non-utility generators. Based on their analyses of the DPU's proposal, the
Companies would be unable to recover a substantial portion of their
stranded cost within the ten-year period without rate increases. However,
while the Companies are unable to predict the ultimate outcome of
restructuring, it is important to note that a recent proposed settlement
agreement presented by another utility to the DPU includes a provision that
lengthens the timeframe for recovery of certain stranded costs to their
original lives thus making it possible for that company to fully recover
all stranded costs without a significant rate increase. That settlement
agreement is currently under review by the DPU.
<PAGE>
<PAGE 16>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
Generally accepted accounting principles require that losses be accrued
in full when costs to complete a contract are expected to exceed related
revenues expected to be realized. To the extent that the Companies
determine that they will be unable to recover costs associated with their
purchased power contracts, the Companies would be required to take an
immediate charge against earnings when such a loss is probable and
estimable. 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 No. 121) which became effective for 1996,
requires impairment losses on long-lived assets to be recognized when the
book value of an asset exceeds its expected future cash flows. This
standard also imposes stricter criteria for the retention of regulatory-
created assets by requiring that such assets be probable of future recovery
at each balance sheet date. To the extent such recovery is not probable at
the balance sheet date, the Companies would be required to take a charge
against earnings in that period.
The Companies currently account for the economic effects of regulation
in accordance with the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS No. 71) based on the cost-of-service regulatory framework
in which they operate. The DPU has proposed that the distribution and
transmission functions of their businesses be regulated under a form of
price capped incentive regulation.
In the event that recovery of specific costs through rates becomes
unlikely or uncertain for all or a portion of the Companies' utility
operations, whether resulting from the expanding effects of competition or
specific regulatory actions which move the Companies away from cost-of-
service ratemaking, SFAS No. 71 would no longer apply. While the Companies
are unable to predict the final rules which may be adopted by the DPU in
its restructuring effort, the Companies could be required to discontinue
the application of SFAS No. 71. Discontinuance of SFAS No. 71 would cause
the write-off of the applicable portions of their regulatory assets which
would have an adverse impact on the Companies' financial position and
results of operations. The Companies will challenge any order that would
have a significant adverse impact on them, including attempts to limit
their recovery of stranded cost.
Retail Choice Pilot Program
On September 3, 1996, the DPU approved Commonwealth Electric's retail
choice pilot program. The program is comprised of two components: under
Subscription A, eligible customers have the opportunity to buy their power
from a supplier other than Commonwealth Electric (an alternative supplier);
under Subscription B, eligible customers continue to buy their power from
Commonwealth Electric, but at prices posted by Commonwealth Electric one
day ahead. All participating customers will pay Commonwealth Electric a
customer charge, transmission and distribution charges, and an access
charge.
The program is available to Commonwealth Electric's 18 commercial and
industrial customers taking service under one of Commonwealth Electric's
economic development rates. Subscription A has been filled by 5 customers
<PAGE>
<PAGE 17>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
having an aggregate load of approximately 15 megawatts. The remaining
customers are eligible to participate in Subscription B. Subscription A
customers have not yet selected an alternative supplier.
The program is designed to allow a limited number of customers the
opportunity to possibly reduce their electric bills while Commonwealth
Electric learns more about real-time pricing and the administrative
requirements associated with open-market competition. Through the program,
Commonwealth Electric expects to develop internal procedures for billing
and allocating the costs for providing an alternative supply to its retail
customers, and to develop methods for educating customers regarding retail
choice. The program is scheduled to continue until December 31, 1997.
Those customers that find that their selection is not right for them
will be able to return Commonwealth Electric service at their prior rate.
Termination of Power Sale Agreement
On June 5, 1996, the DPU approved a power sale termination agreement
between Commonwealth Electric and Altresco Lynn, Inc. (Altresco) that
related to a purchase power obligation of Commonwealth Electric under which
Commonwealth Electric would have been required to purchase approximately 25
MW from Altresco beginning on January 1, 1997. Under the terms of the
termination agreement, Commonwealth Electric returned to Altresco $550,000
of the $750,000 power sale agreement security deposit held by Commonwealth
Electric since April 1992. The remaining $200,000, plus accumulated
interest, was credited to Commonwealth Electric's fuel charge stabilization
account. Consistent with DPU precedent regarding provision of least-cost
electric service, the termination of the power sale agreement, coupled with
providing replacement power when necessary, will save Commonwealth
Electric's customers approximately $34 million, in 1995 dollars, over the
twenty-year life of the initial power sale agreement.
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 and certain other subsidiaries are also involved
in 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 nine months of 1996. For
further information on these matters, refer to the System's 1995 Annual
Report on Form 10-K.
<PAGE>
<PAGE 18>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
Item 1. Legal Proceedings
The System is subject to legal claims and matters arising from its
course of business including Cambridge Electric's involvement in a court
action filed by the Massachusetts Institute of Technology (MIT) relating
to a September 1995 decision of the DPU approving Cambridge Electric's
customer transition charge (CTC) for the recovery of stranded cost. In
this action, MIT has filed an appeal of the DPU decision to the Massachu-
setts Supreme Judicial Court (SJC). Cambridge Electric is an intervenor
in this proceeding. In accordance with the briefing schedule, MIT filed
its initial brief on October 21, 1996. Cambridge Electric is scheduled to
file its brief on November 20, 1996, with MIT to file its reply brief on
December 5, 1996. While no schedule is set for a decision from the SJC,
Cambridge Electric anticipates a decision sometime in the second quarter
of 1997. This issue is discussed more fully in the System's 1995 Annual
Report on Form 10-K. At this time, management is unable to predict the
outcome of this proceeding.
In a previous legal proceeding, on August 27, 1996, the United States
District Court for the District of Massachusetts (District Court) granted
the motions for summary judgement of Cambridge Electric and the DPU and
dismissed the May 1996 complaint filed by MIT. In its complaint, MIT had
alleged that the CTC approved by the DPU and implemented by Cambridge
Electric violated the Public Utility Regulatory Policies Act of 1978
(PURPA). In dismissing MIT's complaint, the District Court found that
MIT's complaint involved an allegation relating to the DPU's application
of PURPA, which is not within the Court's jurisdiction.
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
<PAGE>
<PAGE 19>
COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
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 nine months ended September 30, 1996.
Filed herewith as Exhibit 2 is the restated Financial Data
Schedule for the nine months ended September 30, 1995.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 1996.
<PAGE>
<PAGE 20>
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 and
Accounting Officer
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Date: November 13, 1996
<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 Energy System for the nine months ended September 30
1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000071304
<NAME> COMMONWEALTH ENERGY SYSTEM
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<PERIOD-TYPE> 9-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,027,216
<OTHER-PROPERTY-AND-INVEST> 13,598
<TOTAL-CURRENT-ASSETS> 156,985
<TOTAL-DEFERRED-CHARGES> 147,393
<OTHER-ASSETS> 14,211
<TOTAL-ASSETS> 1,359,403
<COMMON> 43,059
<CAPITAL-SURPLUS-PAID-IN> 111,685
<RETAINED-EARNINGS> 256,046
<TOTAL-COMMON-STOCKHOLDERS-EQ> 410,790
13,020
0
<LONG-TERM-DEBT-NET> 361,446
<SHORT-TERM-NOTES> 78,825
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 31,913
820
<CAPITAL-LEASE-OBLIGATIONS> 12,618
<LEASES-CURRENT> 1,594
<OTHER-ITEMS-CAPITAL-AND-LIAB> 448,377
<TOT-CAPITALIZATION-AND-LIAB> 1,359,403
<GROSS-OPERATING-REVENUE> 749,139
<INCOME-TAX-EXPENSE> 27,676
<OTHER-OPERATING-EXPENSES> 648,161
<TOTAL-OPERATING-EXPENSES> 675,837
<OPERATING-INCOME-LOSS> 73,302
<OTHER-INCOME-NET> 4,021
<INCOME-BEFORE-INTEREST-EXPEN> 77,323
<TOTAL-INTEREST-EXPENSE> 31,593
<NET-INCOME> 45,730
797
<EARNINGS-AVAILABLE-FOR-COMM> 44,933
<COMMON-STOCK-DIVIDENDS> 24,867
<TOTAL-INTEREST-ON-BONDS> 27,039
<CASH-FLOW-OPERATIONS> 64,707
<EPS-PRIMARY> 2.08
<EPS-DILUTED> 0
</TABLE>
<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 Energy System for the nine months ended September
30, 1995 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<RESTATED>
<CIK> 0000071304
<NAME> COMMONWEALTH ENERGY SYSTEM
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<PERIOD-TYPE> 9-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,015,634
<OTHER-PROPERTY-AND-INVEST> 13,722
<TOTAL-CURRENT-ASSETS> 135,929
<TOTAL-DEFERRED-CHARGES> 153,755
<OTHER-ASSETS> 15,356
<TOTAL-ASSETS> 1,334,396
<COMMON> 42,836
<CAPITAL-SURPLUS-PAID-IN> 109,632
<RETAINED-EARNINGS> 227,404
<TOTAL-COMMON-STOCKHOLDERS-EQ> 379,872
13,840
0
<LONG-TERM-DEBT-NET> 396,551
<SHORT-TERM-NOTES> 22,675
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 40,973
820
<CAPITAL-LEASE-OBLIGATIONS> 13,737
<LEASES-CURRENT> 1,619
<OTHER-ITEMS-CAPITAL-AND-LIAB> 464,309
<TOT-CAPITALIZATION-AND-LIAB> 1,334,396
<GROSS-OPERATING-REVENUE> 681,677
<INCOME-TAX-EXPENSE> 12,772
<OTHER-OPERATING-EXPENSES> 603,269
<TOTAL-OPERATING-EXPENSES> 616,041
<OPERATING-INCOME-LOSS> 65,636
<OTHER-INCOME-NET> 1,960
<INCOME-BEFORE-INTEREST-EXPEN> 67,596
<TOTAL-INTEREST-EXPENSE> 33,117
<NET-INCOME> 34,479
843
<EARNINGS-AVAILABLE-FOR-COMM> 33,636
<COMMON-STOCK-DIVIDENDS> 23,958
<TOTAL-INTEREST-ON-BONDS> 29,098
<CASH-FLOW-OPERATIONS> 105,230
<EPS-PRIMARY> 3.17
<EPS-DILUTED> 0
</TABLE>
