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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, 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 2-30057
CANAL ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1733577
(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, 1996
Common Stock, $25 par value 1,523,200 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.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CANAL ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
ASSETS
(Unaudited)
March 31, December 31,
1996 1995
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost$436 521 $436 531
Less - Accumulated depreciation and
amortization 168 231 163 929
268 290 272 602
Add - Construction work in progress 7 142 5 759
Nuclear fuel in process 132 122
275 564 278 483
LEASED PROPERTY, net 12 983 13 128
INVESTMENTS
Equity in corporate joint venture 3 508 3 372
CURRENT ASSETS
Cash 13 12
Accounts receivable-
Affiliated companies 7 720 9 282
Other 7 032 9 520
Electric production fuel oil 692 762
Prepaid property taxes 437 874
Other 2 637 3 435
18 531 23 885
DEFERRED CHARGES
Seabrook 1 6 127 6 436
Seabrook 2 2 868 3 343
Other 20 755 20 813
29 750 30 592
$340 336 $349 460
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CANAL ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
CAPITALIZATION AND LIABILITIES
(Unaudited)
March 31, December 31,
1996 1995
(Dollars in Thousands)
CAPITALIZATION
Common Equity -
Common stock, $25 par value -
Authorized - 2,328,200 shares
Outstanding - 1,523,200 shares,
wholly-owned by Commonwealth
Energy System (Parent) $ 38 080 $ 38 080
Amounts paid in excess of par value 8 321 8 321
Retained earnings 53 201 52 070
99 602 98 471
Long-term debt, including premiums, less
current sinking fund requirements 83 947 83 941
183 549 182 412
CAPITAL LEASE OBLIGATIONS 12 403 12 547
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 9 575 23 425
Advances from affiliates 18 470 5 865
Maturing long-term debt 3 040 3 230
31 085 32 520
Other Current Liabilities -
Current sinking fund requirements 920 920
Accounts payable -
Affiliated companies 1 486 2 049
Other 10 945 19 757
Accrued taxes -
Income 4 330 3 159
Local property and other 813 855
Capital lease obligations 580 581
Accrued interest and other 4 139 3 608
23 213 30 929
54 298 63 449
DEFERRED CREDITS
Accumulated deferred income taxes 72 678 72 914
Unamortized investment tax credits and other 17 408 18 138
90 086 91 052
COMMITMENTS AND CONTINGENCIES
$340 336 $349 460
See accompanying notes.
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CANAL ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
1996 1995
(Dollars in Thousands)
ELECTRIC OPERATING REVENUES
Sales to affiliated companies $27 746 $24 944
Sales to non-affiliated companies 20 175 8 473
47 921 33 417
OPERATING EXPENSES
Fuel used in production 22 961 7 823
Electricity purchased for resale 1 937 4 411
Other operation and maintenance 8 948 8 687
Depreciation 4 546 3 823
Taxes -
Income 3 085 2 028
Local property 696 729
Payroll and other 231 215
42 404 27 716
OPERATING INCOME 5 517 5 701
OTHER INCOME 1 944 9
INCOME BEFORE INTEREST CHARGES 7 461 5 710
INTEREST CHARGES
Long-term debt 2 049 2 062
Other interest charges 473 416
Allowance for borrowed funds
used during construction (30) (100)
2 492 2 378
NET INCOME 4 969 3 332
RETAINED EARNINGS -
Beginning of period 52 070 51 647
Dividends on common stock (3 838) (3 427)
RETAINED EARNINGS -
End of period $53 201 $51 552
See accompanying notes.
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CANAL ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
1996 1995
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 4 969 $ 3 332
Effects of noncash items -
Depreciation and amortization 5 707 5 225
Deferred income taxes and investment
tax credits, net (411) (131)
Earnings from corporate joint venture (136) (129)
Dividends from corporate joint venture - 273
Change in working capital, exclusive of cash
and interim financing (2 361) (695)
All other operating items (716) (1 493)
Net cash provided by operating activities 7 052 6 382
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (1 754) (1 286)
Allowance for borrowed funds used
during construction (30) (100)
Net cash used for investing activities (1 784) (1 386)
FINANCING ACTIVITIES
Payment of short-term borrowings (13 850) (11 325)
Payment of dividends (3 838) (3 427)
Advances from affiliates 12 605 9 940
Sinking fund payments (184) (183)
Net cash used for financing activities (5 267) (4 995)
Net increase in cash 1 1
Cash at beginning of period 12 12
Cash at end of period $ 13 $ 13
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 2 072 $1 846
Income taxes $ 1 189 $ 392
See accompanying notes.
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CANAL ELECTRIC COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) General Information
Canal Electric Company (the Company) is a wholly-owned subsidiary of
Commonwealth Energy System. The parent company is referred to in this
report as the "System" and together with its subsidiaries is collectively
referred to as "the system." The System is an exempt public utility
holding company under the provisions of the Public Utility Holding Company
Act of 1935 and, in addition to its investment in the Company, has
interests in other utility and several non-regulated companies.
(2) Accounting Policies
The Company's significant accounting policies are described in Note 2
of Notes to Financial Statements included in its 1995 Annual Report on Form
10-K filed with the Securities and Exchange Commission. For interim
reporting purposes, the Company 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.
The Company is regulated as to rates, accounting and other matters by
various authorities, including the Federal Energy Regulatory Commission
(FERC) and the Massachusetts Department of Public Utilities (DPU).
Based on the current regulatory framework, the Company accounts for
the economic effects of regulation in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." The Company has established
various regulatory assets in cases where the FERC has permitted or is
expected to permit recovery of specific costs over time. On January 1,
1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No.
121 imposes stricter criteria for regulatory assets by requiring that such
assets be probable of future recovery at each balance sheet date. As of
March 31, 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 an
electric utility restructuring order issued by the DPU in August 1995.
The principal regulatory assets included in deferred charges at March
31, 1996 and December 31, 1995 were as follows:
March 31, December 31,
1996 1995
(Dollars in Thousands)
Seabrook related costs $ 8 701 $ 9 511
Deferred income taxes 14 147 14 106
Postretirement benefit costs 1 523 1 774
Total regulatory assets $24 371 $25 391
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CANAL ELECTRIC COMPANY
Generally, expenses which benefit more than one interim period are
allocated to other periods to more appropriately match revenues and
expenses. Income tax expense is recorded using the statutory rates in
effect applied to book income subject to tax recorded in the interim
period.
The unaudited financial statements for the periods ended March 31,
1996 and 1995, 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 presentation
used in the current period's financial statements.
The Company is a wholesale power company and operates its two
generating units under life-of-the-unit power contracts on file with the
FERC. The price of power under the power contracts is based on a two-part
rate consisting of a demand charge and an energy charge. The demand charge
covers all expenses except fuel costs and includes the recovery of the
original investment. It also provides for any adjustments to that
investment over the economic lives of the units. The energy charge is
based on the cost of fuel and is billed to each purchaser in proportion to
its purchase of power. Purchasers are billed monthly.
The Company also procures bulk electric power at the request of and
for its affiliates thereby securing cost savings for their respective
customers by planning for a power supply on a single system basis.
(3) Commitments and Contingencies
Construction
The Company is engaged in a continuous construction program presently
estimated at $57.2 million for the five-year period 1996 through 2000. Of
that amount, $19.1 million is estimated for 1996. As of March 31, 1996,
construction expenditures, including an allowance for funds used during
construction, amounted to approximately $1.8 million. The program is
subject to periodic review and revision because of 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 environmental
factors. The Company expects to finance these expenditures with internally
generated funds and short-term borrowings.
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CANAL 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, 1996 and 1995 and unit sales for these periods is shown below:
Three Months
Ended March 31,
1996 and 1995
Increase (Decrease)
(Dollars in Thousands)
Electric Operating Revenues $ 14 504 43.4%
Operating Expenses -
Fuel used in production 15 138 193.5
Electricity purchased for resale (2 474) (56.1)
Other operation and maintenance 261 3.0
Depreciation 723 18.9
Taxes -
Federal and state income 1 057 52.1
Local property and other (17) (1.8)
14 688 53.0
Operating Income (184) (3.2)
Other Income 1 935 21 500
Income Before Interest Charges 1 751 30.7
Interest Charges 114 4.8
Net Income $ 1 637 49.1
Unit Sales (MWH) Increase 429 927 102.4
The following is a summary of unit sales for the periods indicated:
Unit Sales (MWH)
Three Months Purchased
Ended Unit 1 Unit 2 For Resale Seabrook 1 Total
March 31, 1996 571 299 135 094 66 651 76 699 849 743
March 31, 1995 - 243 940 87 842 88 034 419 816
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CANAL ELECTRIC COMPANY
Revenue, Fuel and Purchased Power
Operating revenues for the first quarter of 1996 increased $14.5
million or 43.4% due primarily to a substantial increase in unit sales that
reflects a combination of both scheduled and unscheduled maintenance which
kept Unit 1 out of service for the entire first quarter of last year. The
change in unit sales during the quarter also reflects the decreased
availability of Unit 2 reflecting the timing of scheduled maintenance and a
lower level of purchases made on behalf of affiliated retail distribution
companies.
The significant increase in fuel used in production reflects the
impact of the aforementioned Unit 1 outage during the entire first quarter
of 1995, coupled with an increase in the cost of oil. Fuel, purchased
power and transmission costs represented approximately 54% and 39% of
operating revenues in the first quarter of 1996 and 1995, respectively, and
averaged 3 cents per KWH in the current period as compared to 3.1 cents per
KWH for the corresponding period of last year.
Other Operating Expenses
Other operation and maintenance increased by 3% due to an increase in
insurance and benefit costs ($552,000) and the increased availability of
Unit 1, offset in part by lower maintenance costs related to Units 1 and 2
(approximately $900,000). The 18.9% increase in depreciation expense
reflects a higher level of plant-in-service. Federal and state income
taxes increased due to a higher level of pretax income.
Other Income and Interest Charges
The significant increase in other income during the current three-
month period was primarily due to the reversal of a reserve that had been
established for costs associated with postretirement benefits (approx-
imately $1.8 million) following Federal Energy Regulatory Commission
acceptance of rate schedules which provide for the recovery of these costs
over a six-month period which began in March 1996.
Total interest charges increased 4.8% during the period, despite
lower short-term interest rates (which averaged 5.6% as compared to 6.1%
during the first quarter of 1995), due to a higher average level of short-
term borrowings and a decrease in the debt component of allowance for funds
used during construction.
Regulatory Matters
Electric Industry Restructuring
On August 16, 1995, the DPU issued an order calling for the
restructuring of the electric utility industry in Massachusetts in order to
allow customers more flexibility in choosing their electric service
provider and to develop an efficient industry structure and regulatory
framework that minimizes long-term costs to consumers while maintaining the
safety and reliability of electric services with a minimum impact on the
environment. Each of the state's electric utilities, together with other
interested parties, participated in this proceeding that initially
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CANAL ELECTRIC COMPANY
established a set of principles that would govern the restructuring of the
electric industry in Massachusetts.
In February 1996, certain utilities submitted required proposals
detailing how they would plan to move into a competitive market structure.
Since that time, the DPU held a generic proceeding that focused on many of
the policy issues raised in its original order. On April 12, 1996,
Cambridge and Commonwealth Electric, in response to the generic proceeding,
filed comments with the DPU on several issues that should be addressed in
creating a restructured electric utility industry which, together with
comments from other interested parties, provided valuable input to the DPU
in its development of proposed rules that were summarized in its order
issued on May 1, 1996. The proposed rules, which are subject to public
comment and hearings prior to adoption of final rules in October 1996, are
based on the following policies:
(1) An Independent System Operator which: (a) operates the regional
transmission system reliably; (b) is independent and unaffiliated
with electric companies; and (c) applies comparable transmission
rates, terms and conditions to all generators;
(2) A Power Exchange to manage a competitive bidding pool for short-term
power sales;
(3) Functional separation of electric companies into generation, trans-
mission and distribution corporate entities;
(4) Preservation of discounts for low-income customers, shut-off protec-
tions and provision of service to all customers;
(5) Registration requirements for generation suppliers, including market-
ers and aggregators;
(6) A reasonable opportunity for recovery of stranded costs, including a
proposal to protect municipalities from loss of utility property
taxes associated with diminished generation plant value;
(7) Options for phased incentives for electric companies to divest their
generation assets to stimulate a robust competitive market;
(8) Promotion of environmental goals;
(9) Support for energy efficiency and renewable energy resources;
(10) Encouragement, but not a requirement, for towns with Municipal
Electric Companies to participate in the restructured industry;
(11) A price cap system of economic incentive regulation for the remaining
distribution and transmission monopolies;
(12) Unbundling of rates on bills by January 1, 1997 into separate compo-
nents of transmission, distribution and a market proxy for energy
costs. Implementation of competitive generation market by January 1,
1998.
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CANAL ELECTRIC COMPANY
In its May 1, 1996 order, the DPU acknowledged that it does not have
jurisdiction in such areas as environmental regulation and the
establishment of an Independent System Operator or a Power Exchange.
Federal and state environmental agencies and the Federal Energy Regulatory
Commission have the requisite authority in these areas. However, the DPU
determined that it was important for it to express its initial views
regarding these components of a restructured electric industry.
In accordance with the DPU's schedule, Cambridge and Commonwealth
Electric will file revenue-neutral unbundled rates in October 1996 for
effect in January 1997. Also, during 1997, Cambridge and Commonwealth
Electric will file their comprehensive restructuring proposal. One
element of the proposal (announced on February 15, 1996) would require
Cambridge and Commonwealth Electric to voluntarily put their power
capacity entitlements (1,140 MW) to a market test in an effort to develop
a competitive market whereby customers would have the flexibility of
choosing their electric supplier. The proposal calls for the auctioning
in a competitive market of entitlements in all twenty-one contracts,
including contracts held by Cambridge and Commonwealth Electric involving
the Company. The proposal provides for total recovery of the difference
between the current market value of Cambridge and Commonwealth Electric's
power contracts and their original unavoidable costs. This difference,
considered to be a stranded cost, would be recovered through a non-
bypassable access charge paid over an appropriate time period by all
customers in Cambridge and Commonwealth Electric's service areas. The
auction approach has received initial positive reviews from the Common-
wealth of Massachusetts Division of Energy Resources and the Office of the
Attorney General. Management is unable to predict the ultimate outcome of
the overall proceedings or Cambridge and Commonwealth Electric's specific
proposal.
Environmental Matters
The Company is subject to laws and regulations administered by
federal, state and local authorities relating to the quality of the
environment. These laws and regulations affect, among other things, the
siting and operation of electric generating and transmission facilities
and can require the installation of expensive air and water pollution
control equipment. These regulations have had an impact on the Company's
operations in the past and will continue to have an impact on future
operations, capital costs and construction schedules of major facilities.
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CANAL ELECTRIC COMPANY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
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, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended March
31, 1996.
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CANAL ELECTRIC COMPANY
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.
CANAL ELECTRIC COMPANY
(Registrant)
Principal Financial Officer:
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Date: May 14, 1996
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet, statement of income, statement of retained earnings and
statement of cash flows contained in Form 10-Q of Canal Electric Company for
the three months ended March 31, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000016906
<NAME> CANAL ELECTRIC COMPANY
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