-----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, DQkUFrdn5PLIR4sc+pVYN6yyceRAgWm4xaSNmTExwyroSVrXcu47N6977GtqTtpL 5DdV/nYgNIJzTo2e6Bxrpg== 0000071304-96-000015.txt : 19960816 0000071304-96-000015.hdr.sgml : 19960816 ACCESSION NUMBER: 0000071304-96-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMONWEALTH ENERGY SYSTEM CENTRAL INDEX KEY: 0000071304 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 041662010 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07316 FILM NUMBER: 96612649 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 ENGLAND GAS & ELECTRIC ASSOCIATION DATE OF NAME CHANGE: 19810603 10-Q 1 COMMONWEALTH ENERGY SYSTEM 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, 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 August 1, 1996 Common Shares of Beneficial Interest, $2 par value 21,529,676 shares PART I. - FINANCIAL INFORMATION Item 1. Financial Statements COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES CONDENSED BALANCE SHEETS JUNE 30, 1996 AND DECEMBER 31, 1995 ASSETS (Dollars in thousands) June 30, December 31, 1996 1995 (Unaudited) PROPERTY, PLANT AND EQUIPMENT, at original cost Electric $1 116 039 $1 105 502 Gas 349 818 346 990 Other 63 300 63 132 1 529 157 1 515 624 Less - Accumulated depreciation and amortization 521 112 497 627 1 008 045 1 017 997 Add - Construction work in progress and nuclear fuel in process 17 599 10 276 1 025 644 1 028 273 LEASED PROPERTY, net 14 387 14 931 EQUITY IN CORPORATE JOINT VENTURES Nuclear electric power companies (2.5% to 4.5%) 10 123 9 814 Other investments 3 458 3 400 13 581 13 214 CURRENT ASSETS Cash 2 983 4 319 Accounts receivable 98 918 105 377 Unbilled revenues 14 596 31 642 Inventories, at average cost 23 759 25 538 Prepaid taxes and other 6 637 15 843 146 893 182 719 DEFERRED CHARGES 151 029 150 964 $1 351 534 $1 390 101 See accompanying notes. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES CONDENSED BALANCE SHEETS JUNE 30, 1996 AND DECEMBER 31, 1995 CAPITALIZATION AND LIABILITIES (Dollars in thousands) June 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 111 778 111 749 Retained earnings 256 238 235 980 411 075 390 785 Redeemable preferred shares, less current sinking fund requirements 13 590 13 840 Long-term debt, including premiums, less current sinking fund requirements and maturing debt 361 786 377 181 786 451 781 806 CAPITAL LEASE OBLIGATIONS 12 747 13 291 CURRENT LIABILITIES Interim Financing - Notes payable to banks 59 750 55 600 Maturing long-term debt 24 260 33 230 84 010 88 830 Other Current Liabilities - Current sinking fund requirements 8 473 9 103 Accounts payable 114 036 134 908 Accrued taxes 17 425 31 587 Other 35 446 35 407 175 380 211 005 259 390 299 835 DEFERRED CREDITS Accumulated deferred income taxes 172 224 170 182 Unamortized investment tax credits and other 120 722 124 987 292 946 295 169 COMMITMENTS AND CONTINGENCIES $1 351 534 $1 390 101 See accompanying notes. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES CONDENSED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended 1996 1995 1996 1995 OPERATING REVENUES Electric $151 185 $138 643 $318 953 $290 546 Gas 68 033 67 072 191 756 175 050 Steam and other 3 884 3 539 11 097 9 272 223 102 209 254 521 806 474 868 OPERATING EXPENSES Fuel and purchased power 77 750 76 252 176 769 163 468 Cost of gas sold 38 193 39 419 99 806 90 555 Other operation and maintenance 64 915 62 800 126 168 124 691 Depreciation 11 844 11 244 26 511 24 995 Taxes - Federal and state income 5 853 (4 040) 22 901 8 817 Local property and other 5 504 5 864 14 387 14 227 204 059 191 539 466 542 426 753 OPERATING INCOME 19 043 17 715 55 264 48 115 OTHER INCOME 820 23 3 221 1 536 INCOME BEFORE INTEREST CHARGES 19 863 17 738 58 485 49 651 INTEREST CHARGES Long-term debt 8 858 9 772 18 230 19 571 Other interest charges 1 618 1 884 3 066 3 317 Allowance for borrowed funds used during construction (76) (348) (181) (600) 10 400 11 308 21 115 22 288 NET INCOME 9 463 6 430 37 370 27 363 Dividends on preferred shares 267 282 534 564 EARNINGS APPLICABLE TO COMMON SHARES $ 9 196 $ 6 148 $ 36 836 $ 26 799 AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (a) 21 529 676 21 249 624 21 529 676 21 191 128 EARNINGS PER COMMON SHARE (a) $ .43 $ .29 $1.71 $1.26 DIVIDENDS DECLARED PER COMMON SHARE (a) $.385 $.375 $ .77 $ .75 (a) Prior period amounts have been restated to reflect a two-for-one stock split that became effective June 5, 1996. See accompanying notes. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (Dollars in thousands) (Unaudited) 1996 1995 OPERATING ACTIVITIES Net income $ 37 370 $ 27 363 Effects of noncash items - Depreciation and amortization 32 225 30 987 Deferred income taxes and investment tax credits, net 190 (577) Earnings from corporate joint ventures (892) (763) Dividends from corporate joint ventures 525 867 Change in working capital, exclusive of cash and interim financing (1 135) 38 086 All other operating items (9 284) (20 887) Net cash provided by operating activities 58 999 75 076 INVESTING ACTIVITIES Additions to property, plant and equipment (exclusive of AFUDC) - Electric (19 123) (26 927) Gas (3 233) (6 150) Other (253) (522) Allowance for borrowed funds used during construction (181) (600) Net cash used for investing activities (22 790) (34 199) FINANCING ACTIVITIES Sale of common shares 32 4 798 Payment of dividends (17 112) (16 490) Proceeds from (payment of) short-term borrowings 4 150 (21 700) Long-term debt issues refunded (23 230) (10 000) Sinking funds payments (1 385) (1 825) Net cash used for financing activities (37 545) (45 217) Net decrease in cash (1 336) (4 340) Cash at beginning of period 4 319 7 722 Cash at end of period $ 2 983 $ 3 382 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of capitalized amounts) $ 19 785 $ 20 884 Income taxes $ 17 173 $ 4 545 See accompanying notes. 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 2,044 regular employees including 1,209 (59%) represented by various collective bargaining units. Negotiations to resolve a labor dispute with one collective bargaining unit that represents approximately 17% of regular employees are ongoing. The agreement that covered this bargaining unit expired on March 31, 1996 and work performed by these employees has been disrupted since that time. A workforce of management personnel and experienced contractors are performing all essential tasks. Management is unable to predict the ultimate outcome of these negotiations. 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 June 30, 1996 and 1995, reflect, in the opinion of the System, all adjustments (consist- ing 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 presentation used in the current period's financial statements. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES 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 June 30, 1996, SFAS No. 121 did not have an impact on its 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 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: June 30, December 31, 1996 1995 (Dollars in thousands) Postretirement benefit costs including pensions $ 24 701 $ 24 608 Power contract buy-out 22 460 23 838 Fuel charge stabilization 21 975 22 063 Deferred income taxes 14 188 14 106 FERC Order 636 transition costs 10 726 11 711 Yankee Atomic unrecovered plant and decommissioning costs 9 001 10 135 Seabrook related costs 7 891 9 511 Other 14 083 14 700 $125 025 $130 672 The principal regulatory liabilities, reflected in the accompanying condensed balance sheets and related to deferred income taxes, were $19 million and $20.6 million at June 30, 1996 and December 31, 1995, respectively. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES (3) Commitments and Contingencies 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. (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 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. 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 half of 1996, cash flows from operating activities amounted to approximately $59 million and reflect net income of $37.4 million and noncash items including depreciation of $26.5 million and $5.7 million in amortization and deferred income taxes. Working capital since December 31, 1995, exclusive of cash and interim financing, decreased $1.1 million reflecting lower levels of accounts payable ($20.9 million) and accrued taxes ($14.2 million) offset, in part, by a decrease in unbilled revenues ($17 million), prepaid taxes ($9 million), accounts receivable ($6.5 million) and inventories ($1.8 million). Construction expenditures for the first half of 1996 were approxi- mately $22.8 million, including an allowance for funds used during construction (AFUDC) and nuclear fuel. Construction expenditures, preferred and common dividend requirements of the System ($17.1 million) and the refunding of long-term debt ($23.2 million) were funded almost entirely with internally-generated funds. Proceeds from short-term borrowings of $4.2 million helped to meet the cash requirements for the current six-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. 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 six-month periods ended June 30, 1996 and 1995 and unit sales for these periods is shown below: Three Months Six Months Ended June 30, Ended June 30, 1996 and 1995 1996 and 1995 Increase (Decrease) (Dollars in thousands) Operating Revenues - Electric $12 542 9.0% $28 407 9.8% Gas 961 1.4 16 706 9.5 Steam and other 345 9.7 1 825 19.7 13 848 6.6 46 938 9.9 Operating Expenses - Fuel and purchased power 1 498 2.0 13 301 8.1 Cost of gas sold (1 226) (3.1) 9 251 10.2 Other operation and maintenance 2 115 3.4 1 477 1.2 Depreciation 600 5.3 1 516 6.1 Taxes - Federal and state income 9 544 236.2 14 084 159.7 Local property and other (11) (0.2) 160 1.1 12 520 6.5 39 789 9.3 Operating Income 1 328 7.5 7 149 14.9 Other Income 797 3465.2 1 685 109.7 Income Before Interest Charges 2 125 12.0 8 834 17.8 Interest Charges (908) (8.0) (1 173) (5.3) Net Income 3 033 47.2 10 007 36.6 Dividends on preferred shares (15) (5.3) (30) (5.3) Earnings Applicable to Common Shares $ 3 048 49.6 $ 10 037 37.5 Unit Sales Electric - Megawatthours (MWH) Retail 33 610 3.1 56 815 2.5 Wholesale 323 149 122.5 679 140 103.5 356 759 26.3 735 955 25.4 Gas - Billions of British Thermal Units (BBTU) Firm 648 10.4 2 731 12.2 Interruptible and other (276) (14.8) (1 446) (38.3) 372 4.6 1 285 4.9 COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES The following is a summary of electric and gas unit sales for the three and six-month periods ended June 30, 1996 and 1995: Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 Electric Sales - MWH Residential 417 715 392 619 903 739 850 110 Commercial 596 162 590 913 1 179 886 1 177 610 Industrial 109 225 105 941 203 276 202 250 Other 5 108 5 127 11 569 11 685 Total retail sales 1 128 210 1 094 600 2 298 470 2 241 655 Wholesale sales 587 002 263 853 1 335 450 656 310 Total 1 715 212 1 358 453 3 633 920 2 897 965 Gas Sales - BBTU Residential 3 719 3 459 14 143 12 863 Commercial 1 942 1 731 7 072 6 163 Industrial 857 765 2 531 2 239 Other 384 299 1 350 1 100 Total firm sales 6 902 6 254 25 096 22 365 Off-system sales 704 967 953 2 380 Quasi-firm sales 361 520 485 870 Interruptible sales 520 374 893 527 Total 8 487 8 115 27 427 26 142 Electric Operating Revenues, Fuel and Purchased Power Costs Electric operating revenues increased $12.5 million (9%) and $28.4 million (9.8%) during the current quarter and first half of 1996 due mainly to higher total unit sales reflecting an increase in retail unit sales of 3.1% and 2.5% and higher wholesale revenues of $8.5 million and $20.7 million that resulted from the changing capacity needs of non-affiliated utilities and NEPOOL. However, changes in wholesale electric sales have little, if any, impact on net income. The increase in revenues in both current periods was also attributed to the absence of a $7.5 million refund to customers during the second quarter of 1995 that related to settlement agreements reached with the Massachusetts Department of Public Utilities (DPU). The increase in retail unit sales, particularly in the residential sector, during the current quarter and first half of 1996 was attributed mainly to more favorable weather and a slight increase in customers. Fuel and purchased power increased approximately $1.5 million (2%) and $13.3 million (8.1%) during the current three and six-month periods reflecting higher unit sales and greater fuel costs at Canal (a major supplier of electricity to the system) resulting from the absence of scheduled maintenance to Canal Unit 1 that occurred in 1995 offset, to a great degree, by a decline in purchases from independent power producers. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES Gas Operating Revenues and Cost of Gas Sold During the current quarter, gas operating revenues increased nearly $1 million (1.4%) due mainly to higher firm unit sales offset, in part, by a lower level of cost of gas sold ($1.2 million), which reflected a decline in the price of gas and lower off-system and quasi-firm sales. Gas operating revenues for the first half of 1996 increased approximately $16.7 million (9.5%) due mainly to a $9.3 million increase in the cost of gas sold that reflected higher firm and interruptible unit sales. These increases were somewhat offset by a decline in off-system sales and quasi- firm sales and a lower level of C&LM costs ($1.2 million). Fluctuations in interruptible unit sales during both the current quarter and first half of 1996 had no impact on net income. The increase in unit sales to firm customers during the current quarter (10.4%) and first half of 1996 (12.2%) reflects significant weather-related improvements for all customer segments due to the colder than normal weather experienced throughout the region, particularly during the first quarter as compared to milder weather last year. A growing customer base also contributed to the increase in firm unit sales during both current periods. Heating degree days were nearly 4% and 11% higher in the current quarter and first half of 1996 as compared to the same periods in 1995. The decreases in off-system and quasi-firm sales had no impact on net income during the current quarter and first half 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 pending approval of the Company's margin sharing proposals. The proposal related to quasi-firm sales was filed in December 1995 and a ruling is expected from the DPU later this year. The proposal for off-system sales is expected to be filed by the end of this year. Other Operation and Maintenance For the current quarter and first half of 1996, other operation and maintenance increased approximately $2.1 million (3.4%) and $1.5 million (1.2%) reflecting higher postretirement benefit costs ($1.7 million and $3.3 million) and the net impact of a labor dispute discussed in Note 1 of Notes to Condensed Financial Statements in Item 1 of this report. These increases were partially offset by an $851,000 and $1.7 million reduction in maintenance costs, primarily associated with Canal Unit 1, for the three and six-month periods, lower insurance costs and a decline in the provision for bad debts. Depreciation and Taxes Depreciation expense increased $600,000 (5.3%) and $1.5 million (6.1%) during the current three and six-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 mainly to the impact of the settlement agreements previously discussed and a greater level of taxable income. Local property and other taxes were virtually unchanged as compared to the same periods in 1995. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES Other Income and Interest Charges During the current quarter and first half of 1996, other income increased $797,000 and $1.7 million as compared to the same periods in 1995 due mainly to a gain recognized on the sale of a parcel of non-utility land. The change in the current six-month period also reflects the recording of a regulatory asset by Canal for costs associated with postretirement benefits that are now being recovered in wholesale rates. The decline in total interest charges for the current three and six- month periods mainly 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; (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 soon issue a revised schedule for electric companies to make company-specific unbundled rate filings. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES 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. 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 COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES 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. 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 half of 1996. For further information on these matters, refer to the System's 1995 Annual Report on Form 10-K. 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 two court actions 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. The first proceeding is an appeal by MIT of the DPU decision to the Massachusetts Supreme Judicial Court (SJC). Cambridge Electric is an intervenor in this proceeding. The SJC has not yet established a schedule for submitting briefs. 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. The second proceeding involves a complaint filed by MIT in May 1996 with the United States District Court alleging that the CTC is inconsistent with the provisions of the Public Utility Regulatory Policies Act of 1978 (PURPA), discriminates against qualifying facilities, and is inconsistent with the policies of the Federal Energy Regulatory Commission (FERC) regarding stranded cost recovery. MIT named both the DPU and Cambridge Electric as parties to the complaint. In June 1996, Cambridge Electric filed a Motion to Dismiss MIT's complaint arguing that the Court lacks jurisdiction over the matter, the CTC is wholly consistent with PURPA, and, in the alternative, the Court must abstain from considering the case to avoid interfering with the SJC proceeding. Cambridge Electric also noted that MIT's complaint is virtually identical to a complaint filed earlier by MIT at the FERC that the FERC dismissed. A hearing on the Motion to Dismiss was held in July 1996. The Court has taken the matter under advisement, and, at this time, management is unable to predict the outcome of this proceeding. 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 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 six months ended June 30, 1996. Filed herewith as Exhibit 2 is the restated Financial Data Schedule for the six months ended June 30, 1995. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended June 30, 1996. 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: August 14, 1996 EX-27 2 FINANCIAL DATA SCHEDULE - JUNE 30, 1996
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 Energy System for the six months ended June 30 1996 and is qualified in its entirety by reference to such financial statements. 0000071304 COMMONWEALTH ENERGY SYSTEM 1,000 DEC-31-1996 JUN-30-1996 6-MOS PER-BOOK 1,025,644 13,581 146,893 151,029 14,387 1,351,534 43,059 111,778 256,238 411,075 13,590 0 361,786 59,750 0 0 31,913 820 12,747 1,640 458,213 1,351,534 521,806 22,901 443,641 466,542 55,264 3,221 58,485 21,115 37,370 534 36,836 16,578 18,230 58,999 1.71 0
EX-27 3 FINANCIAL DATA SCHEDULE - JUNE 30, 1995 - RESTATED
UT This schedule contains restated summary financial information extracted from the balance sheet, statement of income and statement of cash flows contained in Form 10-Q of Commonwealth Energy System for the six months ended June 30, 1995 and is qualified in its entirety by reference to such financial statements. 0000071304 COMMONWEALTH ENERGY SYSTEM 1,000 DEC-31-1995 JUN-30-1995 6-MOS PER-BOOK 1,003,293 13,544 129,366 161,694 15,544 1,323,441 42,577 107,492 228,599 378,668 14,410 0 396,732 23,150 0 0 40,973 820 13,805 1,740 453,143 1,323,441 474,868 8,817 417,936 426,753 48,115 1,536 49,651 22,288 27,363 564 26,799 15,926 19,571 75,076 1.26 0
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