-----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, Tg/EZUK+lNEpEjyFCDRr819CzRdN+FRD/rMk17gD5ty4SsQgtqDA+ZePemWkw/qu qaXTd01OFcpzhRHQJY7e2w== 0000071304-98-000014.txt : 19980518 0000071304-98-000014.hdr.sgml : 19980518 ACCESSION NUMBER: 0000071304-98-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: SEC FILE NUMBER: 002-07749 FILM NUMBER: 98622970 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 March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission File Number 2-7749 COMMONWEALTH ELECTRIC COMPANY (Exact name of registrant as specified in its charter) Massachusetts 04-1659070 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Main Street, Cambridge, Massachusetts 02142-9150 (Address of principal executive offices) (Zip Code) (617) 225-4000 (Registrant's telephone number, including area code) (Former name, address and fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class of Common Stock May 1, 1998 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 MARCH 31, 1998 AND DECEMBER 31, 1997 ASSETS (Dollars in thousands) March 31, December 31, 1998 1997 (Unaudited) PROPERTY, PLANT AND EQUIPMENT, at original cost $553,971 $550,449 Less - Accumulated depreciation 178,617 174,488 375,354 375,961 Add - Construction work in progress 4,988 4,010 380,342 379,971 INVESTMENTS Equity in nuclear electric power company 584 519 Other 14 14 598 533 CURRENT ASSETS Cash 2,503 1,496 Accounts receivable - Affiliates 788 1,753 Customers 46,553 45,199 Unbilled revenues 1,413 9,162 Prepaid property taxes 1,522 3,043 Inventories and other 4,536 4,349 57,315 65,002 DEFERRED CHARGES Regulatory assets 79,225 70,112 Other 3,714 3,601 82,939 73,713 $521,194 $519,219 See accompanying notes. COMMONWEALTH ELECTRIC COMPANY CONDENSED BALANCE SHEETS MARCH 31, 1998 AND DECEMBER 31, 1997 CAPITALIZATION AND LIABILITIES (Dollars in thousands) March 31, December 31, 1998 1997 (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 38,820 31,993 187,031 180,204 Long-term debt, less current sinking fund requirements 146,142 147,192 333,173 327,396 CURRENT LIABILITIES Interim Financing - Notes payable to banks 25,600 14,900 Advances from affiliates 4,495 5,315 30,095 20,215 Other Current Liabilities - Current sinking fund requirements 3,553 3,553 Accounts payable - Affiliates 10,616 12,007 Other 22,927 32,826 Accrued taxes - Local property and other 2,152 3,299 Income 20,603 19,114 Other 13,281 16,528 73,132 87,327 103,227 107,542 DEFERRED CREDITS Accumulated deferred income taxes 50,604 50,283 Unamortized investment tax credits 6,588 6,696 Other 27,602 27,302 84,794 84,281 COMMITMENTS AND CONTINGENCIES $521,194 $519,219 See accompanying notes. COMMONWEALTH ELECTRIC COMPANY CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands - unaudited) 1998 1997 ELECTRIC OPERATING REVENUES $106,101 $117,361 OPERATING EXPENSES Electricity purchased for resale, transmission and fuel 65,673 77,067 Other operation and maintenance 18,823 21,751 Depreciation 4,519 4,419 Taxes - Income 4,212 2,950 Local property 1,530 1,623 Payroll and other 797 959 95,554 108,769 OPERATING INCOME 10,547 8,592 OTHER INCOME 20 10 INCOME BEFORE INTEREST CHARGES 10,567 8,602 INTEREST CHARGES Long-term debt 3,321 3,389 Other interest charges 419 415 3,740 3,804 NET INCOME 6,827 4,798 RETAINED EARNINGS - Beginning of period 31,993 27,334 End of period $ 38,820 $ 32,132 See accompanying notes. COMMONWEALTH ELECTRIC COMPANY CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands - unaudited) 1998 1997 OPERATING ACTIVITIES Net income $ 6,827 $ 4,798 Effects of noncash items - Depreciation and amortization 5,788 7,029 Deferred income taxes and investment tax credits, net (179) 1,789 Change in working capital, exclusive of cash and interim financing (5,501) (1,673) Transition costs deferral (11,552) - Fuel charge stabilization deferral 1,666 (4,359) All other operating items (234) (4,270) Net cash (used for) provided by operating activities (3,185) 3,314 INVESTING ACTIVITIES Additions to property, plant and equipment (inclusive of AFUDC) (4,638) (4,143) FINANCING ACTIVITIES Proceeds from short-term borrowings 10,700 4,350 Payments to affiliates (820) (725) Sinking funds payments (1,050) (1,050) Net cash provided by financing activities 8,830 2,575 Net increase in cash 1,007 1,746 Cash at beginning of period 1,496 358 Cash at end of period $ 2,503 $ 2,104 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of capitalized amounts) $ 5,020 $ 5,074 Income taxes $ 2,509 $ 1,122 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 nonregulated companies. The Company has 692 regular employees including 478 (69%) who are represented by three collective bargaining units. One of these collective bargaining units, representing approximately 12% of regular employees, recently reached an agreement on a new five-year contract that remains in effect until April 30, 2003. Agreements with two other bargaining units (representing approximately 57% of regular employees) will remain in effect until September 30, 2002 and October 31, 2001, respectively. Employee relations have generally been satisfactory. During the second quarter of 1997, the system initiated a voluntary personnel reduction program. As a result of this program, the total number of regular employees has declined by approximately 18% since December 31, 1996. (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 1997 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 March 31, 1998 and 1997 reflect, in the opinion of the Company, all adjustments (consisting of only normal recurring accruals) necessary to summarize fairly the results for such periods. In addition, certain prior period amounts are reclassified from time to time to conform with the presenta- tion used in the current period's financial statements. 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. (b) Regulatory Assets and Liabilities The Company is regulated as to rates, accounting and other matters by COMMONWEALTH ELECTRIC COMPANY various authorities including the Federal Energy Regulatory Commission (FERC) and the Massachusetts Department of Telecommunications and Energy (DTE). 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 DTE 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. In the event the criteria for applying SFAS No. 71 are no longer met, the accounting impact would be an extra-ordinary, noncash charge to operations of an amount that could be material. Criteria that give rise to the discontinuance of SFAS No. 71 include: 1) increasing competition that restricts the Company'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 from cost-based regulation to another form of regulation. These criteria are reviewed on a regular basis to ensure the continuing application of SFAS No. 71 is appropriate. 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 genera- tion, are probable of future recovery. As a result of electric industry restructuring, the Company discontin- ued application of accounting principles applied to its investment in electric generation facilities effective March 1, 1998. The Company will not be required to write off any of its generation-related assets, including regulatory assets. These assets will be retained on the Company's Balance Sheets because the legislation and the DTE's plan for a restructured electric industry specifically provide for their recovery through a non-bypassable transition charge. The principal regulatory assets included in deferred charges were as follows: March 31, December 31, 1998 1997 (Dollars in thousands) Power contract buy-out $16,915 $17,609 Fuel charge stabilization 28,486 29,655 Postretirement benefits costs 12,032 12,271 Transition costs 11,581 - Yankee Atomic unrecovered plant and decommissioning costs 3,236 3,436 Pilgrim nuclear plant litigation costs 5,824 5,929 Conservation and load management costs 157 314 Other 994 898 $79,225 $70,112 COMMONWEALTH ELECTRIC COMPANY The regulatory liabilities, reflected in deferred credits in the accompanying Balance Sheets were as follows: March 31, December 31, 1998 1997 (Dollars in thousands) Excess Seabrook-related deferred income taxes $ 346 $ 698 Other deferred income taxes 1,875 1,875 Excess replacement power refunds 124 246 $ 2,345 $ 2,819 In November 1997, the Commonwealth of Massachusetts enacted a compre- hensive electric utility industry restructuring bill. On November 19, 1997, the Company, together with affiliates Cambridge Electric Light Company (Cambridge Electric) and Canal Electric Company (Canal), filed a restructuring plan with the DTE. The plan, approved by the DTE on February 27, 1998, describes the process by which the Company and Cam- bridge Electric began, on March 1, 1998, to initiate a ten percent rate reduction for all customer classes and to allow customers to choose their energy supplier. As part of the plan, the DTE authorized the recovery of certain strandable costs and provides that certain future costs may be deferred to achieve or maintain the rate reductions that the restructuring bill requires. The legislation gives the DTE the authority to determine the amount of strandable costs that will be eligible for recovery. Costs that will qualify as strandable costs and be eligible for recovery include, but are not limited to, certain above market costs associated with generating facilities, costs associated with long-term commitments to purchase power at above market prices from independent power producers and regulatory assets and associated liabilities related to the generation portion of the electric business. The cost of transitioning to competition will be mitigated, in part, through the divestiture of the Company's non-nuclear generating assets in an auction process that is expected to be completed in 1998. Any net proceeds in excess of book value received from the divestiture of these assets will be used to mitigate transition costs. The Company's ability to recover its transition costs will depend on several factors, including the aggregate amount of stranded costs the Company will be allowed to recover and the market price of electricity. Management believes that the Company will recover its transition costs. A change in any of the above listed factors or in the current legislation could affect the recovery of transition costs and may result in a loss to the Company. For additional information relating to industry restructur- ing, see the "Industry Restructuring" section under Management's Discus- sion and Analysis and Results of Operations. (3) Commitments and Contingencies The Company is engaged in a continuous construction program presently estimated at $106 million for the five-year period 1998 through 2002. Of that amount, $23.8 million is estimated for 1998. As of March 31, 1998, the Company's construction expenditures amounted to approximately $4.6 million, including an allowance for funds used during construction. The COMMONWEALTH ELECTRIC COMPANY 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 months ended March 31, 1998 and 1997 and unit sales for these periods is shown below: Three Months Ended March 31, 1998 and 1997 Increase (Decrease) (Dollars in thousands) Electric Operating Revenues $(11,260) (9.6)% Operating Expenses - Electricity purchased for resale, transmission and fuel (11,394) (14.8) Other operation and maintenance (2,928) (13.5) Depreciation 100 2.3 Taxes - Federal and state income 1,262 42.8 Local property and other (255) (9.9) (13,215) (12.1) Operating Income 1,955 22.8 Other Income 10 100.0 Income Before Interest Charges 1,965 22.8 Interest Charges (64) (1.7) Net Income $ 2,029 42.3 Unit Sales (Megawatthours or MWH) Retail 4,533 0.5 Wholesale 101,792 33.5 Total unit sales 106,325 9.2 The following is a summary of unit sales (in MWH) for the periods indicated: Unit Sales (MWH) Three Months Ended Total Retail Wholesale March 31, 1998 1,267,812 861,952 405,860 March 31, 1997 1,161,487 857,419 304,068 COMMONWEALTH ELECTRIC COMPANY Operating Revenues, Electricity Purchased for Resale, Transmission and Fuel Despite a 9.2% increase in total unit sales, operating revenues for the first quarter of 1998 were $11.3 million lower than the corresponding period in 1997 reflecting a deferral of electricity purchased for resale and trans- mission costs ($11.6 million) in conjunction with the Company's restructuring plan as approved by the Massachusetts Department of Telecommunications and Energy (DTE). The Company has unbundled its rates, provided customers with a ten percent discount as of March 1, 1998 and affords customers the opportunity to purchase generation supply in the competitive market consistent with the electric industry restructuring legislation further discussed below. Delivery rates are composed of a customer charge (to collect metering and billing costs), a distribution charge, a transition charge (to collect stranded costs), a transmission charge, an energy conservation charge (to collect costs for demand-side management programs) and a renewable energy charge. Electric- ity supply services provided by the Company include optional standard offer service and default service. Amounts collected through these various charges will be reconciled to actual expenditures on an on-going basis. Total unit sales for the quarter increased primarily as a result of an increase in wholesale sales to other utilities. Other Operation and Maintenance The decline in other operation and maintenance was primarily due to lower operating costs that resulted, in part, from a personnel reduction program (PRP) that began in the second quarter of last year ($1.5 million), a reduc- tion in insurance and employee benefits costs ($248,000), and a reduction in tree-trimming costs ($212,000) associated with the Company's transmission system. The impact of these factors was offset somewhat by higher costs relating to information technology, telecommunications and network services ($1.6 million) which includes costs associated with Year 2000 compliance. Depreciation and Taxes Depreciation expense increased due to a higher level of depreciable property, plant and equipment. Federal and state income taxes increased due mainly to the change in pretax income. The decline in local property and other taxes was primarily due to lower payroll taxes reflecting the impact of the PRP. Interest Charges Total interest charges decreased in the current quarter reflecting scheduled sinking fund payments on long-term debt. Industry Restructuring On November 25, 1997, the Governor of Massachusetts signed into law the Electric Industry Restructuring Act (the Act). Provisions of this legislation include, among other things, a 10 percent discount on standard offer service and retail choice of energy supplier effective March 1, 1998, with a subse- quent increase in the discount on standard offer service to 15 percent upon completion of divestiture of non-nuclear generating assets and possible securitization of net non-mitigable stranded costs (which, for the Company, COMMONWEALTH ELECTRIC COMPANY are primarily the result of above-market purchased power contracts with non- utility generators); and, recovery of transition costs subject to review and an audit process. The Company, together with affiliates Cambridge Electric Light Company (Cambridge Electric) and Canal Electric Company (Canal), filed a comprehensive electric restructuring plan with the DTE in November 1997 that was substan- tially approved by the DTE on February 27, 1998. While the Company is encouraged with the treatment afforded transition cost recovery by the legislation and the DTE, the mandated customer discounts could have a signifi- cant impact on future cash flows of the Company and Cambridge Electric. It is now likely that a referendum will appear on the ballot in November of this year that is seeking to repeal the legislation. The Company's management is unable to predict what the ultimate outcome of this challenge will be. Auction Process In March 1997, the Company, together with Cambridge Electric and Canal, submitted a report to the DTE that detailed the proposed auction process for selling their electric generation assets and entitlements. The process included a standard sealed-bid auction for generation assets and entitlements from purchased power contracts of the Company and Cambridge Electric. The auction process provided a market-based approach to maximizing stranded cost mitigation and minimizing the transition costs that retail customers will have to pay for stranded cost recovery. A request for bids from interested parties was issued last August followed by an Offering Memorandum in October. Potential bidders examined all pertinent information related to the generating facilities and purchased power agreements in order to prepare and submit their first round of bids in mid-December. In January 1998, the companies selected a short list of potential bidders, each of whom submitted a final binding bid on May 8, 1998. The ultimate selection of the winning bidder or bidders is expected to be made after a two-week evaluation period. The closing process and the required regulatory filings are expected to be completed in 1998. Year 2000 The Company has been involved in Year 2000 compliancy since 1996. A complete inventory and review of software, information processing and delivery systems has been completed, and work continues on computer systems wherever necessary. While some computer systems have already been updated, tested and placed in production, the Company expects to complete the balance of the modifications by early 1999. Costs associated with Year 2000 compliancy are being expensed as incurred. The total cost of this project is expected to be funded with internally generated funds. Management believes that, with appropriate modifications, the Company will be fully compliant regarding all Year 2000 issues and will continue to provide its products and services uninterrupted through the millennium change. Failure to become fully compliant could have a significant impact on the Company's operations. 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 three months ended March 31, 1998. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended March 31, 1998. 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: May 15, 1998 JAMES D. RAPPOLI James D. Rappoli, Financial Vice President and Treasurer EX-27 2 FINANCIAL DATA SCHEDULE - MARCH 31, 1998
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 three months ended March 31, 1998 and is qualified in its entirety by reference to such financial statements. 0000071222 COMMONWEALTH ELECTRIC COMPANY 1,000 DEC-31-1998 MAR-31-1998 3-MOS PER-BOOK 380,342 598 57,315 82,939 0 521,194 51,099 97,112 38,820 187,031 0 0 146,142 30,095 0 0 3,553 0 0 0 154,373 521,194 106,101 4,212 91,342 95,554 10,547 20 10,567 3,740 6,827 0 6,827 0 3,321 (3,185) 0 0
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