-----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, RQnu6DOVZwn/JGBHgTmC1FtbnH4JxSXixxxgGzBKcZafwdomRmIbVMfILAhqfqrC RYb+qxEViglzQdVIuMuh3w== 0000071304-97-000011.txt : 19970515 0000071304-97-000011.hdr.sgml : 19970515 ACCESSION NUMBER: 0000071304-97-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 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: 97604309 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 March 31, 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 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 May 1, 1997 Common Shares of Beneficial Interest, $2 par value 21,531,784 shares PART I. - FINANCIAL INFORMATION Item 1. Financial Statements COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES CONDENSED BALANCE SHEETS MARCH 31, 1997 AND DECEMBER 31, 1996 ASSETS (Dollars in thousands) March 31, December 31, 1997 1996 (Unaudited) PROPERTY, PLANT AND EQUIPMENT, at original cost Electric $1,153,807 $1,150,818 Gas 359,764 357,403 Other 66,500 66,365 1,580,071 1,574,586 Less - Accumulated depreciation and amortization 549,674 536,041 1,030,397 1,038,545 Add - Construction work in progress and nuclear fuel in process 8,811 7,082 1,039,208 1,045,627 EQUITY IN CORPORATE JOINT VENTURES Nuclear electric power companies (2.5% to 4.5%) 13,441 10,046 Other investments 28 3,349 13,469 13,395 CURRENT ASSETS Cash 7,429 1,495 Accounts receivable 134,042 117,008 Unbilled revenues 19,219 31,698 Inventories, at average cost 15,786 31,525 Prepaid taxes and other 10,975 14,765 187,451 196,491 DEFERRED CHARGES Regulatory assets 153,198 154,291 Other 20,894 19,151 174,092 173,442 $1,414,220 $1,428,955 See accompanying notes. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES CONDENSED BALANCE SHEETS MARCH 31, 1997 AND DECEMBER 31, 1996 CAPITALIZATION AND LIABILITIES (Dollars in thousands) March 31, December 31, 1997 1996 (Unaudited) CAPITALIZATION Common share investment - Common shares, $2 par value - Authorized - 50,000,000 shares Outstanding - 21,531,784 in 1997 and 21,529,676 in 1996 $ 43,064 $ 43,059 Amounts paid in excess of par value 111,746 111,685 Retained earnings 278,593 260,950 433,403 415,694 Redeemable preferred shares, less current sinking fund requirements 12,960 13,020 Long-term debt, including premiums, less current sinking fund requirements and maturing debt 354,262 355,305 800,625 784,019 CAPITAL LEASE OBLIGATIONS 12,406 12,346 CURRENT LIABILITIES Interim Financing - Notes payable to banks 88,100 118,475 Maturing long-term debt 14,260 14,260 102,360 132,735 Other Current Liabilities - Current sinking fund requirements 9,525 8,473 Accounts payable 80,378 90,269 Accrued taxes 33,403 16,970 Other 52,678 53,835 175,984 169,547 278,344 302,282 DEFERRED CREDITS Accumulated deferred income taxes 171,190 174,877 Unamortized investment tax credits and other 151,655 155,431 322,845 330,308 COMMITMENTS AND CONTINGENCIES $1,414,220 $1,428,955 See accompanying notes. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Dollars in thousands) 1997 1996 (Unaudited) OPERATING REVENUES Electric $176,804 $167,678 Gas 132,267 123,723 Steam and other 7,119 7,213 316,190 298,614 OPERATING EXPENSES Fuel and purchased power 106,259 99,019 Cost of gas sold 72,110 61,613 Other operation and maintenance 60,594 61,253 Depreciation 15,512 14,667 Taxes - Local property and other 9,149 8,534 Federal and state income 16,674 17,397 280,298 262,483 OPERATING INCOME 35,892 36,131 OTHER INCOME 649 2,491 INCOME BEFORE INTEREST CHARGES 36,541 38,622 INTEREST CHARGES Long-term debt 8,404 9,372 Other interest charges 1,805 1,448 Allowance for borrowed funds used during construction (68) (105) 10,141 10,715 NET INCOME 26,400 27,907 Dividends on preferred shares 252 267 EARNINGS APPLICABLE TO COMMON SHARES $ 26,148 $ 27,640 AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 21,530,378 21,529,676 EARNINGS PER COMMON SHARE $1.21 $1.28 DIVIDENDS DECLARED PER COMMON SHARE $.395 $.385 See accompanying notes. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Dollars in thousands) 1997 1996 (Unaudited) OPERATING ACTIVITIES Net income $ 26,400 $ 27,907 Effects of noncash items - Depreciation and amortization 19,993 17,583 Deferred income taxes and investment tax credits, net 2,082 (270) Earnings from corporate joint ventures (456) (457) Dividends from corporate joint ventures 382 90 Change in working capital, exclusive of cash and interim financing 21,411 6,706 All other operating items (14,446) 2,021 Net cash provided by operating activities 55,366 53,580 INVESTING ACTIVITIES Additions to property, plant and equipment (exclusive of AFUDC) - Electric (5,851) (8,172) Gas (2,626) (1,381) Other (651) (135) Allowance for borrowed funds used during construction (68) (105) Net cash used for investing activities (9,196) (9,793) FINANCING ACTIVITIES Sale of common shares - 32 Payment of dividends (8,757) (8,556) Payment of short-term borrowings (30,375) (33,725) Sinking funds payments (1,104) (1,104) Net cash used for financing activities (40,236) (43,353) Net increase in cash 5,934 434 Cash at beginning of period 1,495 4,319 Cash at end of period $ 7,429 $ 4,753 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of capitalized amounts) $ 9,627 $ 9,505 Income taxes $ 4,112 $ 9,986 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 1,968 regular employees including 1,163 (59%) represented by various collective bargaining units. A contract with a bargaining unit representing approximately 5% of regular employees that was scheduled to expire in May 1997 was ratified in April 1997 and is effective through June 1, 2001. Accounting Policies (a) Principles of Accounting The system's significant accounting policies are described in Note 2 of Notes to Consolidated Financial Statements included in its 1996 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 March 31, 1997 and 1996, reflect, in the opinion of the System, all adjustments necessary to summarize fairly the results for such periods. In addition, certain prior period amounts are reclassified from time to time to conform with the presentation used in the current period's financial statements. The results for interim periods are not necessarily indicative of results for the entire year because of seasonal variations in the consumption of energy and Commonwealth Gas' seasonal rate structure. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES (b) Regulatory Assets and Liabilities The system's operating utility companies are 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 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." Regulated subsidiaries of the System have 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, regulatory liabilities established by the system are required to be refunded to customers over time. Effective 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. SFAS No. 121 did not have an impact on the system's financial position upon adoption. This result may change as modifications are made to the current regulatory framework due to ongoing electric industry restructuring efforts in Massachusetts. If all or a separable portion of the system'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 under cost- based ratemaking for the system's remaining regulated operations. In addition, the system would be required to determine any impairment to the carrying costs of deregulated 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 Discussion and Analysis of Results of Operations. The principal regulatory assets included in deferred charges were as follows: March 31, December 31, 1997 1996 (Dollars in Thousands) Connecticut Yankee unrecovered plant and decommissioning costs $ 34,051 $ 35,879 Postretirement benefits costs including pensions 25,620 25,051 Fuel charge stabilization 24,931 21,504 Power contract buy-out 20,020 20,794 Deferred income taxes 13,638 13,597 FERC Order 636 transition costs 8,623 9,680 Yankee Atomic unrecovered plant and decommissioning costs 7,242 7,798 Seabrook related costs 5,443 6,262 Other 13,630 13,726 $153,198 $154,291 COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES On April 15, 1997, the DPU issued an accounting ruling allowing Commonwealth Gas to include in cost-of-service postretirement benefits costs and to amortize the deferred balance of $10.5 million at March 31, 1997 associated with these costs over a period not to exceed ten years beginning in April 1997. The regulatory liabilities, reflected in the accompanying Condensed Balance Sheets and related to deferred income taxes, were $16.8 million and $17.7 million at March 31, 1997 and December 31, 1996, respectively. (3) Commitments and Contingencies Construction Program The system is engaged in a continuous construction program presently estimated at $298 million for the five-year period 1997 through 2001. Of that amount, $68.2 million is estimated for 1997. The program is subject to periodic review and revision. 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. Supplemental interim funds are borrowed on a short-term basis and, when necessary, replaced with new equity and/or debt issues through permanent financing secured on an individual company basis. The system purchases 100% of all subsidiary common stock issues and provides, to the extent possible, a portion of the subsidiaries' short-term financing needs. These capital resources provide the funds required for the subsidiary companies' construction programs, current operations, debt service and other capital requirements. For the first three months of 1997, cash flows from operating activities amounted to approximately $55.4 million and reflect net income of $26.4 million and noncash items including depreciation of $15.5 million, $4.5 million in amortization and deferred income taxes (net of investment tax credits). The change in working capital since December 31, 1996, exclusive of cash and interim financing, amounted to $21.4 million and had a positive impact on cash flows from operating activities, reflecting lower inventory levels ($15.7 million), unbilled revenues ($12.5 million) and prepaid taxes ($5.2 million), coupled with a higher level of accrued taxes ($16.4 million). These factors were offset, in part, by a higher level of accounts receivable ($17.0 million) and a decline in accounts payable ($9.9 million). Construction expenditures for the first three months of 1997 were approximately $9.2 million, including an allowance for funds used during construction (AFUDC) and nuclear fuel. Construction expenditures, preferred and common dividend requirements of the System ($8.8 million) and the payment of short-term borrowings ($30.4 million) were funded entirely with internally-generated funds. Results of Operations The following is a discussion of certain significant factors which have affected operating revenues, expenses and net income during the periods included in the accompanying Condensed Statements of Income. This discussion should be read in conjunction with the Notes to Condensed Financial Statements appearing elsewhere in this report. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES A summary of the period to period changes in the principal items included in the Condensed Statements of Income for the three months ended March 31, 1997 and 1996 and unit sales for these periods are shown below: Three Months Ended March 31, 1997 and 1996 Increase (Decrease) (Dollars in Thousands) Operating Revenues - Electric $ 9,126 5.4 % Gas 8,544 6.9 Steam and other (94) (1.3) 17,576 5.9 Operating Expenses - Fuel and purchased power 7,240 7.3 Cost of gas sold 10,497 17.0 Other operation and maintenance (659) (1.1) Depreciation 845 5.8 Taxes - Local property and other 615 7.2 Federal and state income (723) (4.2) 17,815 6.8 Operating Income (239) (0.7) Other Income (1,842) (73.9) Income Before Interest Charges (2,081) (5.4) Interest Charges (574) (5.4) Net Income (1,507) (5.4) Dividends on preferred shares (15) (5.6) Earnings Applicable to Common Shares $(1,492) (5.4) Unit Sales - Electric - Megawatthours (MWH) Retail (184) - Wholesale 424,886 56.8 424,702 22.1 Gas - Billions of British Thermal Units (BBTU) Firm (937) (5.2) Interruptible and other 505 67.0 (432) (2.3) COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES The following is a summary of electric and gas unit sales for the periods indicated: Three Months Ended March 31, 1997 1996 Electric Sales - MWH Residential 474,051 486,024 Commercial 589,588 583,724 Industrial 99,772 94,051 Other 6,665 6,461 Total retail sales 1,170,076 1,170,260 Wholesale to other systems 1,173,334 748,448 Total 2,343,410 1,918,708 Gas Sales - BBTU Residential 9,882 10,424 Commercial 4,850 5,130 Industrial 1,573 1,674 Other 952 966 Total firm sales 17,257 18,194 Off-system sales 797 249 Quasi-firm sales 3 140 Interruptible sales 451 357 Total 18,508 18,940 Electric Revenues, Fuel and Purchased Power Costs For the first quarter of 1997, electric operating revenues increased approximately $9.1 million or 5.4% mainly due to higher fuel and purchased power costs ($7.2 million) and an increase in conservation and load management (C&LM) costs ($1.8 million). Fuel and purchased power costs increased during the first quarter by approximately $7.2 million or 7.3% primarily due to higher wholesale unit sales attributable to the increased availability of Canal Electric Company's Units 1 and 2 reflecting the timing of both scheduled and unscheduled maintenance in 1996. Also contributing to the increase was higher fuel and replacement power costs reflecting the permanent shutdown of the Connecticut Yankee nuclear unit during 1996 and the absence of power from the Maine Yankee nuclear unit which remained out of service during the current quarter while repair work continues. Gas Revenues and Cost of Gas Sold For the first three months of 1997, gas operating revenues increased approximately $8.5 million or 6.9% due primarily to a higher level of cost of gas sold ($10.5 million) offset, in part, by lower firm unit sales ($1.3 million), and a lower level of C&LM costs ($874,000). COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES The decrease in unit sales to firm customers reflects the impact of the milder weather conditions experienced during the first quarter on all customer segments. For the current quarter, heating degree days totaled 2,965 compared to 3,324 for the same period in 1996, a decrease of nearly 11% and 7% below normal. The fluctuation in interruptible and other sales reflects the competitive market that exists today in the natural gas industry. Other Operating Expenses For the first three months of 1997, other operation and maintenance decreased 1.1% or $659,000 reflecting the reversal of an accrual relating to a vacation time adjustment for Commonwealth Gas relating to a 1996 labor dispute ($814,000) and a lower provision for bad debts ($513,000) offset, in part, by higher C&LM costs ($952,000). Depreciation expense increased 5.8% or $845,000 due to a higher level of depreciable plant. The $615,000 (7.2%) increase in local property and other taxes was due to an increase in the state unemployment tax rate for Commonwealth Gas related to the 1996 labor dispute and higher property tax rates and assessments within the system's service territory. Federal and state income taxes decreased $723,000 (4.2%) and reflect the level of pretax income. Other Income and Interest Charges For the first quarter of 1997, other income decreased by $1.8 million (73.9%) due primarily to the absence of the 1996 reversal of a reserve for costs associated with Canal Electric's postretirement benefits following Federal Energy Regulatory Commission acceptance of rate schedules which provided for the recovery of these costs over a six-month period that began in March 1996. Total interest charges for the current quarter decreased 5.4% or $574,000 due to scheduled sinking fund payments and maturing long-term debt offset, in part, by a higher level of short-term borrowings. Short-term interest rates were approximately 5.6% for both periods. Electric Industry Restructuring In August 1995, the DPU issued an order calling for the restructur- ing of the electric utility industry in Massachusetts. On May 1, 1996, the DPU issued a draft order containing proposed rules for implementing electric industry restructuring, and 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 concerning electric industry restructuring have also been filed by the Governor of the Commonwealth of Massachusetts, on February 24, 1997, and by the Massachusetts Legislature's own Joint Committee on Electric Utility Restructuring (the Committee), on March 20, 1997. Each of the plans proposed by the DPU, the 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. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES 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 generation 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. 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 price. 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 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 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 Governor's legislation also provides a mechanism for electric utilities to reduce their stranded costs by financing the renegotiation or buy-out of above-market purchase power contracts. The bill authorizes the Massachusetts Industrial Finance Agency COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES 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 implement 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. Transmission 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 system submitted comments on the Committee's legislative proposal making specific recommendations for changes with respect to increasing 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 Governor and the Committee. During the last several months, three Massachusetts electric utilities have announced negotiated settlement agreements with the Massachusetts Attorney General's Office (Attorney General) that include divestiture of generating assets, provision for a ten percent reduction in customers' charges and recovery of stranded costs through a non-bypassable access charge. One settlement agreement has already been approved by the DPU. Implementation of any restructuring settlement may be affected by actions of the Massachusetts Legislature. The system has engaged in preliminary settlement discussions with the Attorney General and has 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 system would file a full restructuring plan with the DPU. On March 31, 1997, the system submitted a report to the DPU which detailed the proposed auction process for selling its electric generation assets and entitlements. The process will include a standard, sealed-bid auction for generation assets and an ascending-bid auction for power contracts with the securitization of remaining obligations. The auction process would provide a market-based approach to maximizing stranded cost COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES mitigation and minimizing the access charges that ratepayers will have to pay for stranded cost recovery. As described in Note 2(b) of the Notes to Condensed Financial Statements, the system 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 system 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) increasing 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 system periodically reviews these criteria to ensure that the continuing application of SFAS No. 71 is appropriate. 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 system believes that its regulatory assets, including those related to generation, are probable of future recovery. 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. In April, Commonwealth Gas recorded an additional liability and corresponding regulatory asset of $1.2 million due to an increase in the site clean-up cost estimate for an MGP site for which Commonwealth Gas was previously cited as a Potentially Responsible Party. The DPU has approved recovery of costs associated with MGP sites. Commonwealth Gas is also involved in certain other known or potentially contaminated sites where the associated costs may not be recoverable in rates. For further information on other related environmental matters, refer to the System's 1996 Annual Report on Form 10-K. New Accounting Standard The System is required to adopt Statement of Financial Accounting Standards No. 128 (SFAS 128) "Earnings per Share" for the year ended December 31, 1997. SFAS 128 requires the presentation of both basic and diluted earnings per share (EPS). Diluted EPS reflects the possible impact on EPS that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES The System issued potential awards in the form of common shares to certain key employees pursuant to its Long Term Incentive Compensation Plan during the first quarter of 1997. If SFAS 128 had been adopted for the quarter ended March 31, 1997, both basic and diluted EPS would be $1.21. COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES PART II - OTHER INFORMATION Item 1. Legal Proceedings The System is subject to legal claims and matters arising from its course of business including Cambridge Electric as an intervenor in a pending appeal at the Massachusetts Supreme Judicial Court (SJC) filed by the Massachusetts Institute of Technology involving a DPU decision approving a customer transition charge for the recovery of stranded investment costs. While no schedule is set for a decision from the SJC, Cambridge Electric anticipates a decision sometime in the second quarter of 1997. This issue is discussed more fully in the System's 1996 Annual Report on Form 10-K. 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 (a) The Annual Meeting of Shareholders was held on May 1, 1997. (b) The three nominees, Kevin C. Bryant, Franklin M. Hundley and Gerald L. Wilson, listed in the System's Notice of 1997 Annual Meeting and Proxy Statement dated March 28, 1997 were elected to the Board of Trustees of Commonwealth Energy System. Item 5. Other Information Kevin C. Bryant was elected to the System's Board of Trustees effective May 1, 1997. Mr. Bryant, age 36, is currently Regional President for BankBoston based in Fall River, Massachusetts. Mr. Bryant is a graduate of Babson College and also serves on the board of several community and civic groups. 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, 1997. Filed herewith as Exhibit 2 is the restated Financial Data Schedule for the three months ended March 31, 1996. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended March 31, 1997. 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: May 14, 1997 EX-27 2 FINANCIAL DATA SCHEDULE - MARCH 31, 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 Energy System for the three months ended March 31, 1997 and is qualified in its entirety by reference to such financial statements. 0000071304 COMMONWEALTH ENERGY SYSTEM 1,000 DEC-31-1997 MAR-31-1997 3-MOS PER-BOOK 1,025,342 13,469 187,451 174,092 13,866 1,414,220 43,064 111,746 278,593 433,403 12,960 0 354,262 88,100 0 0 22,965 820 12,406 1,460 487,844 1,414,220 316,190 16,674 263,624 280,298 35,892 649 36,541 10,141 26,400 252 26,148 8,505 8,404 55,366 1.21 0
EX-27 3 RESTATED FINANCIAL DATA SCHEDULE - MARCH 31, 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 three months ended March 31, 1996 and is qualified in its entirety by reference to such financial statements. 0000071304 COMMONWEALTH ENERGY SYSTEM 1,000 DEC-31-1996 MAR-31-1996 3-MOS PER-BOOK 1,023,604 13,581 169,929 145,163 14,758 1,367,035 43,059 111,778 255,331 410,168 13,780 0 376,137 21,875 0 0 41,323 820 13,088 1,670 488,174 1,367,035 298,614 17,397 245,086 262,483 36,131 2,491 38,622 10,715 27,907 267 27,640 8,289 9,372 53,580 1.28 0
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