-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nu+Q+zTGlk3wxLM1SG2zmPw0DlL13P4/dK58P5EECFE1w1IdjefTowzgawE64CGJ WouMd5BHik2yLwg58EYI8Q== 0000071222-97-000002.txt : 19970815 0000071222-97-000002.hdr.sgml : 19970815 ACCESSION NUMBER: 0000071222-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMONWEALTH ELECTRIC CO CENTRAL INDEX KEY: 0000071222 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041659070 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-07749 FILM NUMBER: 97663307 BUSINESS ADDRESS: STREET 1: ONE MAIN ST CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6172254000 MAIL ADDRESS: STREET 1: P O BOX 9150 CITY: CAMBRIDGE STATE: MA ZIP: 02142-9150 FORMER COMPANY: FORMER CONFORMED NAME: NEW BEDFORD GAS & EDISON LIGHT CO DATE OF NAME CHANGE: 19810331 FORMER COMPANY: FORMER CONFORMED NAME: NEW BEDFORD GAS LIGHT CO DATE OF NAME CHANGE: 19701106 10-Q 1 COMMONWEALTH ELECTRIC COMPANY FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549-1004 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission File Number 2-7749 COMMONWEALTH ELECTRIC COMPANY (Exact name of registrant as specified in its charter) Massachusetts 04-1659070 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Main Street, Cambridge, Massachusetts 02142-9150 (Address of principal executive offices) (Zip Code) (617) 225-4000 (Registrant's telephone number, including area code) (Former name, address and fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class of Common Stock August 1, 1997 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. PART I - FINANCIAL INFORMATION Item 1. Financial Statements COMMONWEALTH ELECTRIC COMPANY CONDENSED BALANCE SHEETS JUNE 30, 1997 AND DECEMBER 31, 1996 ASSETS (Dollars in thousands) June 30, December 31, 1997 1996 (Unaudited) PROPERTY, PLANT AND EQUIPMENT, at original cost $543,060 $535,004 Less - Accumulated depreciation 170,367 163,397 372,693 371,607 Add - Construction work in progress 1,989 2,315 374,682 373,922 INVESTMENTS Equity in nuclear electric power company 597 643 Other 14 14 611 657 CURRENT ASSETS Cash 2,430 358 Accounts receivable - Affiliates 2,873 2,662 Customers 40,390 42,644 Unbilled revenues 10,539 6,741 Prepaid property taxes - 3,024 Inventories and other 5,022 4,580 61,254 60,009 DEFERRED CHARGES Regulatory assets 71,700 68,129 Other 7,799 3,282 79,499 71,411 $516,046 $505,999 See accompanying notes. COMMONWEALTH ELECTRIC COMPANY CONDENSED BALANCE SHEETS JUNE 30, 1997 AND DECEMBER 31, 1996 CAPITALIZATION AND LIABILITIES (Dollars in thousands) June 30, December 31, 1997 1996 (Unaudited) 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 27,687 27,334 175,898 175,545 Long-term debt, less current sinking fund requirements 149,687 150,734 325,585 326,279 CURRENT LIABILITIES Interim Financing - Notes payable to banks 24,325 15,000 Advances from affiliates 7,665 3,070 31,990 18,070 Other Current Liabilities - Current sinking fund requirements 3,553 3,553 Accounts payable - Affiliates 8,594 10,213 Other 27,452 28,137 Accrued taxes - Local property and other 93 3,025 Income 12,757 15,462 Other 22,034 16,274 74,483 76,664 106,473 94,734 DEFERRED CREDITS Accumulated deferred income taxes 48,938 47,716 Unamortized investment tax credits 6,910 7,126 Other 28,140 30,144 83,988 84,986 COMMITMENTS AND CONTINGENCIES $516,046 $505,999 See accompanying notes. COMMONWEALTH ELECTRIC COMPANY CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (Dollars in thousands) (Unaudited) Three Months Ended Six Months Ended 1997 1996 1997 1996 ELECTRIC OPERATING REVENUES $111,405 $104,958 $228,766 $222,854 OPERATING EXPENSES Electricity purchased for resale, transmission and fuel 73,261 66,304 150,328 145,534 Other operation and maintenance 29,472 20,263 51,223 40,376 Depreciation 4,419 4,290 8,838 8,580 Taxes - Income (847) 2,910 2,103 5,906 Local property 1,529 1,457 3,152 2,891 Payroll and other 682 645 1,641 1,685 108,516 95,869 217,285 204,972 OPERATING INCOME 2,889 9,089 11,481 17,882 OTHER INCOME (EXPENSE) (65) (289) (55) (261) INCOME BEFORE INTEREST CHARGES 2,824 8,800 11,426 17,621 INTEREST CHARGES Long-term debt 3,407 3,492 6,796 6,984 Other interest charges 515 588 955 1,092 Allowance for borrowed funds used during construction (26) (21) (51) (69) 3,896 4,059 7,700 8,007 NET INCOME (LOSS) (1,072) 4,741 3,726 9,614 RETAINED EARNINGS - Beginning of period 32,132 16,792 27,334 20,708 Dividends on common stock (3,373) (1,533) (3,373) (10,322) End of period $ 27,687 $ 20,000 $ 27,687 $ 20,000 See accompanying notes. COMMONWEALTH ELECTRIC COMPANY CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (Dollars in thousands) (Unaudited) 1997 1996 OPERATING ACTIVITIES Net income $ 3,726 $ 9,614 Effects of noncash items - Depreciation and amortization 12,697 10,782 Deferred income taxes and investment tax credits, net (504) 273 Change in working capital, exclusive of cash and interim financing (1,354) (12,091) Fuel charge stabilization deferral (6,873) 970 All other operating items (6,311) (5,274) Net cash provided by operating activities 1,381 4,274 INVESTING ACTIVITIES Additions to property, plant and equipment (exclusive of AFUDC) (8,758) (10,445) Allowance for borrowed funds used during construction (51) (69) Net cash used for investing activities (8,809) (10,514) FINANCING ACTIVITIES Proceeds from short-term borrowings 9,325 6,775 Proceeds from affiliates 4,595 10,920 Payment of dividends (3,373) (10,322) Sinking funds payments (1,047) (1,047) Net cash provided by financing activities 9,500 6,326 Net increase in cash 2,072 86 Cash at beginning of period 358 1,430 Cash at end of period $ 2,430 $ 1,516 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of capitalized amounts) $ 7,504 $ 7,791 Income taxes $ 3,913 $ 6,159 See accompanying notes. COMMONWEALTH ELECTRIC COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (1) General Information Commonwealth Electric Company (the Company) is a wholly-owned subsidiary of Commonwealth Energy System. The parent company is referred to in this report as the "System" and together with its subsidiaries is collectively referred to as "the system." The System is an exempt public utility holding company under the provisions of the Public Utility Holding Company Act of 1935 and, in addition to its investment in the Company, has interests in other utility and several non-regulated companies. The Company has 799 regular employees including 521 (65%) who are represented by three collective bargaining units. New agreements were reached in early 1996 with two bargaining units (representing approximate- ly 54% 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. The third agreement representing 11% of regular employees expires on April 30, 1998. Employee relations have generally been satisfactory. During the second quarter of 1997, the system initiated a voluntary personnel reduction program. For additional information, see the "Person- nel Reduction Program" section under Management's Discussion and Analysis of Results of Operations. (2) Significant Accounting Policies (a) Principles of Accounting The Company's significant accounting policies are described in Note 2 of Notes to Financial Statements included in its 1996 Annual Report on Form 10-K filed with the Securities and Exchange Commission. For interim reporting purposes, the Company follows these same basic accounting poli- cies 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 unaudited financial statements for the periods ended June 30, 1997 and 1996 reflect, in the opinion of the Company, all adjustments (consist- ing of only normal recurring accruals, except for those described in the "Personnel Reduction Program" section under Management's Discussion and Analysis of Results of Operations) 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. Income tax expense is recorded using the statutory rates in effect applied to book income subject to tax recorded in the interim period. 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 and the accrual for costs associated with the personnel reduction program referred to above. COMMONWEALTH ELECTRIC COMPANY (b) Regulatory Assets and Liabilities The Company is regulated as to rates, accounting and other matters by various authorities including the Federal Energy Regulatory Commission (FERC) and the Massachusetts Department of Public Utilities (DPU). Based on the current regulatory framework, the Company 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." The Company has established various regulatory assets in cases where the DPU and/or the FERC have permitted or are expected to permit recovery of specific costs over time. Similarly, the regulatory liabilities established by the Company are required to be refunded to customers over time. Effective January 1, 1996, the Company 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. SFAS No. 121 did not have an impact on the Company's financial position or results of operations upon adoption. This result may change as modifica- tions are made to the current regulatory framework due to ongoing electric industry restructuring efforts in Massachusetts. If all or a separable portion of the Company's operations becomes no longer subject to the provisions of SFAS No. 71, a write-off of related regulatory assets and liabilities would be required, unless some form of transition cost recovery continues through rates established and collected for the Company's remaining regulated operations. In addition, the Company would be required to determine any impairment to the carrying costs of deregu- lated plant and inventory assets. However, on December 30, 1996, the DPU issued an order containing "Model Rules" for industry restructuring that management believes would essentially allow full recovery of stranded costs. For additional information relating to industry restructuring, see the "Electric Industry Restructuring" section under Management's Discus- sion and Analysis of Results of Operations. The principal regulatory assets included in deferred charges at June 30, 1997 and December 31, 1996 were as follows: June 30, December 31, 1997 1996 (Dollars in thousands) Fuel charge stabilization $29,508 $21,504 Power contract buy-out 19,236 20,794 Postretirement benefits costs including pensions 11,781 12,092 Pilgrim nuclear plant litigation costs 6,108 6,286 Yankee Atomic unrecovered plant and decommissioning costs 3,711 4,333 Conservation and load management costs 629 2,322 Other 727 798 $71,700 $68,129 COMMONWEALTH ELECTRIC COMPANY The regulatory liabilities included in other deferred credits at June 30, 1997 and December 31, 1996 were as follows: June 30, December 31, 1997 1996 (Dollars in thousands) Excess Seabrook-related deferred income taxes $ 1,745 $ 2,792 Other deferred income taxes 1,970 2,086 Excess replacement power refunds 614 982 $ 4,329 $ 5,860 (3) Commitments and Contingencies The Company is engaged in a continuous construction program presently estimated at $109 million for the five-year period 1997 through 2001. Of that amount, $23.3 million is estimated for 1997. As of June 30, 1997, the Company's construction expenditures amounted to approximately $8.8 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. 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. COMMONWEALTH ELECTRIC COMPANY Item 2. Management's Discussion and Analysis of Results of Operations The following is a discussion of certain significant factors which have affected operating revenues, expenses and net income during the periods included in the accompanying condensed statements of income. This discussion should be read in conjunction with the Notes to Condensed Financial Statements appearing elsewhere in this report. A summary of the period to period changes in the principal items included in the condensed statements of income for the three and six months ended June 30, 1997 and 1996 and unit sales for these periods is shown below: Three Months Ended Six Months Ended June 30, June 30, 1997 and 1996 1997 and 1996 Increase (Decrease) (Dollars in thousands) Electric Operating Revenues $ 6,447 6.1% $ 5,912 2.7% Operating Expenses - Electricity purchased for resale, transmission and fuel 6,957 10.5 4,794 3.3 Other operation and maintenance 9,209 45.4 10,847 26.9 Depreciation 129 3.0 258 3.0 Taxes - Federal and state income (3,757) (129.1) (3,803) (64.4) Local property and other 109 5.2 217 4.7 12,647 13.2 12,313 6.0 Operating Income (6,200) (68.2) (6,401) (35.8) Other Income 224 77.5 206 78.9 Income Before Interest Charges (5,976) (67.9) (6,195) (35.2) Interest Charges (163) (4.0) (307) (3.8) Net Income $ (5,813) (122.6) $ (5,888) (61.2) Unit Sales (Megawatthours or MWH) Retail 3,216 0.4 2,473 0.1 Wholesale 59,120 31.7 132,726 31.8 Total 62,336 6.1 135,199 6.4 The following is a summary of unit sales (in MWH) for the periods indicated: Three Months Six Months Period Ended Total Retail Wholesale Total Retail Wholesale June 30, 1997 1,078,398 832,794 245,604 2,239,885 1,690,213 549,672 June 30, 1996 1,016,062 829,578 186,484 2,104,686 1,687,740 416,946 COMMONWEALTH ELECTRIC COMPANY Operating Revenues, Electricity Purchased for Resale, Transmission and Fuel The increase in operating revenues for the six-month period ended June 30, 1997 from the corresponding period in 1996 was due to wholesale sales ($3.9 million) reflecting the changing capacity needs of non-affiliated utilities and the New England Power Pool. Fluctuations in the level of wholesale electric sales have no impact on net income. The recovery of costs associated with conservation and load management programs ($1.1 million) and other miscellaneous revenues ($.8 million) also contributed to the increase in the current six-month period. The increase in operating revenues for the three-month period ended June 30, 1997 from the corresponding period in 1996 was primarily due to the increased cost of electricity purchased for resale, transmission and fuel to retail customers ($5.6 million) and higher wholesale sales ($1.1 million). Electricity purchased for resale, transmission and fuel expense increased in the current quarter and six-month period due to higher unit sales offset somewhat by greater available generation (by 97,000 MWH (48.5%) and 383,000 MWH (129.2%)), respectively, from the Company's affiliate, Canal Electric Company (Canal), at a lower cost than was available from several non-utility generating units and other contracted purchased power sources in the same period of a year ago. Purchases from Canal were lower in 1996 due to sched- uled maintenance on Canal Unit 2. Other Operation and Maintenance Other operation and maintenance includes the following: Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (Dollars in millions) Other operation and maintenance $29.5 $20.3 $51.2 $40.4 Less: Personnel Reduction Program 8.4 - 8.4 - Storm-related maintenance 2.0 - 2.0 - Conservation and load manage- ment accelerated recovery - - 1.3 - Net $19.1 $20.3 $39.5 $40.4 The increase in other operation and maintenance was primarily due to one- time costs related to a Personnel Reduction Program initiated during the current quarter (as further discussed below), to storm damage costs related to an April 1 blizzard, and to costs attributable to conservation and load management programs due to approval received in the first quarter of 1997 from the Massachusetts Department of Public Utilities (DPU) for accelerated recovery of costs. In the current quarter, after excluding the impact of the above factors, the decline in expense was primarily due to a $671,000 reduc- tion in insurance and employee benefits costs. COMMONWEALTH ELECTRIC COMPANY Depreciation and Taxes Depreciation expense increased slightly in the current three and six-month periods due to a higher level of depreciable property, plant and equipment. The decline in federal and state income taxes was due to a lower level of pretax income. Local property and other tax increases for the current three and six-month periods primarily reflect higher rates and assessments in the Company's service area. Other Income and Interest Charges Other income increased in the current three and six-month periods from the same periods in 1996 due to the absence of a settlement paid in the second quarter of 1996 by the Company related to conservation management services provided by an outside vendor. Total interest charges declined in the current three and six-month periods reflecting scheduled sinking fund payments on long-term debt and a lower average amount of short-term borrowings during the period. Personnel Reduction Program As initially discussed in the Company's 1996 Annual Report on Form 10-K filed with the Securities and Exchange Commission, the Company announced the details of a system-wide voluntary Personnel Reduction Program (PRP) in May 1997. The goal of the PRP is to achieve a reduced, more efficient and more productive workforce in response to the significant regulatory changes facing the System's companies. This action follows the recent management consolida- tion of the system's electric and gas operations. The expectation is that the workforce will be reduced by 15% to 20%. The PRP is offered to substantially all regular and part-time employees of the system. Eligibility for employees covered by collective bargaining agreements is subject to negotiation. The election period is from May 13 through August 29, 1997. The system reserves the right to limit the number of participants in the program to 300; however, the system expects the final participation level to exceed this amount. The program provides severance based on years of service, the continuation of certain health and dental insurance for specified periods and limited reimbursement for certain educational and/or outplacement services. Currently, approximately 14% of the Company's employees have applied for the PRP. The Company estimates that the cost of termination benefits as described above, including a portion of costs for certain affiliates but excluding generation-related costs that are being addressed separately as part of the industry restructuring process, will approximate $8.4 million which was recorded in the second quarter and had an after-tax income impact of $5.1 million. The payback period is expected to be less than one year. Electric Industry Restructuring On December 30, 1996, the DPU issued a final order announcing its "Model Rules and Legislative Proposal" as a guide in the creation of a competitive market for electric generation in Massachusetts. Legislative proposals COMMONWEALTH ELECTRIC COMPANY concerning electric industry restructuring were filed by the former Governor of the Commonwealth of Massachusetts on February 24, 1997, and by the Massa- chusetts Legislature's Joint Committee on Electric Utility Restructuring (the Committee) on March 20, 1997. Each of the plans proposed by the DPU, the former Governor and the Committee is intended to provide customers with the opportunity to achieve lower electric bills beginning on the target date of January 1, 1998. In its "Model Rules," the DPU has proposed that the minimum structural reorganization needed to create a competitive market is the functional separation of generation, transmission and distribution within one integrated company, and the establishment of a separate marketing affiliate if a company retains generation assets. Other elements of the DPU's Model Rules provide that electric customers will be able to buy their power on the open market; distribution services will remain a service that continues to be provided exclusively by the existing local distribution companies in clearly defined service territories; and customers will have three types of electric genera- tion choices. First, customers may enter into unregulated agreements with a competitive supplier for the provision of generation. Second, customers may continue to buy power directly from their electric distribution company at a price regulated by the DPU, which is known as standard offer service. Third, customers who have received generation from a competitive supplier but who, for any reason, have stopped receiving such generation will be able to receive default generation service, provided by distribution companies at spot market prices. In some regulatory jurisdictions, changes in the electric industry could reduce the opportunity that currently exists for electric companies to recover their investment in generating plant and other costs previously approved by regulators and included in current rates. These potential losses, which may result from subjecting electric company generation to the pressures of a competitive market, are typically referred to as "stranded costs." The single largest component of stranded costs, which are significant to the system, relates to above-market purchased power contracts that the Company and Cambridge Electric have with non-utility generators. However, the DPU has concluded that it is in the public interest to provide electric companies a reasonable opportunity to collect net, non-mitigable stranded costs. The DPU has proposed that stranded costs associated with owned generation facilities, regulatory assets, and purchased power obligations be collected over the expected economic life of the generating facility, the current amortization schedule of the regulatory asset, or the contractual term of the purchased power obligation, respectively. The DPU's proposal requires that any stranded cost recovery for an electric utility be subject to mitigation efforts to reduce embedded costs over time. The Model Rules specify that mitigation should include such measures as sales of capacity and energy from owned generation, renegotiation or buy-out of purchased power contracts, and sales and voluntary writedowns of assets. The former Governor's restructuring proposal includes: a standard offer generation service option for residential and small business customers for a five-year period; recovery by electric utilities of net, non-mitigable stranded costs over a 12-year period; the recovery of reasonable employee transition costs for utility workers directly affected by electric industry restructuring; and, at a minimum, the functional separation of generation, transmission and distribution services. The former Governor's legislation COMMONWEALTH ELECTRIC COMPANY also provides a mechanism for electric utilities to reduce their stranded costs by financing the renegotiation or buy-out of above-market purchased power contracts. The bill authorizes the Massachusetts Industrial Finance Agency to issue electric rate reduction bonds to electric utilities that receive a financing order from the DPU. The criteria for eligibility to apply for the financing order include: (1) DPU approval of a plan to provide retail access and divestiture of non-nuclear generating assets; and (2) demonstration that such contract buy-out or purchase, including the cost of financing, will substantially reduce costs to ratepayers. The Committee issued both a comprehensive report, which outlines options for the Legislature's consideration as debate on restructuring continues, and a set of recommendations and a legislative package that is designed to imple- ment electric industry restructuring in Massachusetts. Elements of the Committee's legislative proposal include the functional separation of utility companies into generation, transmission and distribution companies. Transmis- sion and distribution companies would remain regulated while generation companies would be unregulated with pricing determined by the market. The Committee's proposal establishes a retail access date of January 1, 1998 or later, as determined by the DPU, calls for a 10% rate reduction for all customers and allows for the recovery of certain net, non-mitigable stranded costs over a ten-year period. The proposal also encourages divestiture as a mitigation measure by authorizing companies to securitize stranded costs through the issuance of rate reduction bonds only where the company has divested itself of non-nuclear generation assets. On May 6, 1997, the Company and Cambridge Electric submitted comments on the Committee's legislative proposal making specific recommendations for changes with respect to increas- ing the time frame for recovery of stranded costs including power contracts, the increased use of securitization and other issues. The Massachusetts Legislature, which will render the final passage of any restructuring law, is now considering the legislative proposals of the DPU, the former Governor and the Committee. During the last several months, three Massachusetts electric utilities announced negotiated settlement agreements with the Massachusetts Attorney General's Office (Attorney General) that include divestiture of generating assets, provision for a 10% reduction in customers' bills and recovery of stranded costs through a non-bypassable access charge. One settlement agreement has been approved by the DPU. Implementation of any restructuring settlement may be affected by actions of the Massachusetts Legislature. The Company and Cambridge Electric have recently engaged in formal settle- ment discussions with the Attorney General and have provided the Attorney General with information to further the development of a comprehensive settlement. In the unlikely event that the parties are unable to complete a settlement, the companies would file a full restructuring plan with the DPU. On March 31, 1997, the Company and Cambridge Electric submitted a report to the DPU which detailed the proposed auction process for selling their electric generation assets and entitlements. The process will include a standard, sealed-bid auction for generation assets and purchased power contracts with the securitization of remaining obligations. The auction process would provide a market-based approach to maximizing stranded cost mitigation and minimizing the access charges that ratepayers will have to pay for stranded cost recovery. The Company and Cambridge Electric anticipate COMMONWEALTH ELECTRIC COMPANY that the bidding process will begin shortly after Labor Day. As described in Note 2(b) of the Notes to Condensed Financial Statements, the Company complies with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." In the event the Company is somehow unable to meet the criteria for following SFAS No. 71, the accounting impact would be an extraordinary, non-cash charge to operations in an amount that could be material. Criteria that could give rise to the discontinuance of SFAS No. 71 include: 1) increas- ing competition restricting the system's ability to establish prices to recover specific costs, and 2) a significant change in the current manner in which rates are set by regulators. The Company periodically reviews these criteria to ensure that the continuing application of SFAS No. 71 is appropri- ate. Recently, the Securities and Exchange Commission has questioned the ability of certain utilities continuing the application of SFAS No. 71 where legislation provided for the transition to retail competition. The issue of when and how to discontinue the application of SFAS No. 71 by utilities during transition to competition has been referred to the Financial Accounting Standards Board's Emerging Issues Task Force and guidance on this issue is expected in the near future. Based on the current evaluation of the various factors and conditions that are expected to impact future cost recovery, the Company believes that its regulatory assets, including those related to electric generation, are probable of future recovery. COMMONWEALTH ELECTRIC COMPANY PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not a party to any pending material legal proceeding. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule Filed herewith as Exhibit 1 is the Financial Data Schedule for the six months ended June 30, 1997. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended June 30, 1997. COMMONWEALTH ELECTRIC COMPANY SIGNATURE 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 and Accounting Officer: Date: August 14, 1997 JAMES D. RAPPOLI James D. Rappoli, Financial Vice President and Treasurer EX-27 2 FINANCIAL DATA SCHEDULE - JUNE 30, 1997
UT 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 six months ended June 30, 1997 and is qualified in its entirety by reference to such financial statements. 0000071222 COMMONWEALTH ELECTRIC COMPANY 1,000 DEC-31-1997 JUN-30-1997 6-MOS PER-BOOK 374,682 611 61,254 79,499 0 516,046 51,099 97,112 27,687 175,898 0 0 149,687 31,990 0 0 3,553 0 0 0 154,918 516,046 228,766 2,103 215,182 217,285 11,481 (55) 11,426 7,700 3,726 0 3,726 3,373 6,796 1,381 0 0
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