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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-30057
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, 1997
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, 1997 AND DECEMBER 31, 1996
ASSETS
(Dollars in thousands)
March 31, December 31,
1997 1996
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost $463 927 $464 003
Less - Accumulated depreciation and
amortization 184 545 179 307
279 382 284 696
Add - Construction work in progress 1 560 943
Nuclear fuel in process 1 830 1 597
282 772 287 236
INVESTMENTS
Equity in corporate joint venture 3 197 3 321
CURRENT ASSETS
Cash 12 12
Accounts receivable-
Affiliated companies 10 464 10 294
Other 11 029 12 390
Electric production fuel oil 817 979
Prepaid taxes -
Income - 64
Property 397 795
Other 3 014 3 087
25 733 27 621
DEFERRED CHARGES
Regulatory assets 19 081 19 859
Other 5 843 5 486
24 924 25 345
$336 626 $343 523
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CANAL ELECTRIC COMPANY
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 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 56 437 52 620
102 838 99 021
Long-term debt, including premiums, less
current sinking fund requirements 83 626 83 618
186 464 182 639
CAPITAL LEASE OBLIGATIONS 11 734 11 878
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 15 375 26 550
Advances from affiliates 6 300 7 250
21 675 33 800
Other Current Liabilities -
Current sinking fund requirements 350 350
Accounts payable -
Affiliated companies 1 331 1 347
Other 17 125 18 123
Accrued taxes -
Income 2 481 -
Local property and other 541 795
Capital lease obligations 576 576
Accrued interest and other 4 479 3 986
26 883 25 177
48 558 58 977
DEFERRED CREDITS
Accumulated deferred income taxes 71 247 71 550
Unamortized investment tax credits and other 18 623 18 479
89 870 90 029
COMMITMENTS AND CONTINGENCIES
$336 626 $343 523
See accompanying notes.
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CANAL ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Dollars in thousands)
(Unaudited)
1997 1996
ELECTRIC OPERATING REVENUES
Sales to affiliated companies $34 310 $27 746
Sales to non-affiliated companies 27 376 20 175
61 686 47 921
OPERATING EXPENSES
Fuel used in production 35 878 22 961
Electricity purchased for resale 2 672 1 937
Other operation and maintenance 8 596 8 948
Depreciation 5 065 4 546
Taxes -
Income 2 542 3 085
Local property 670 696
Payroll and other 228 231
55 651 42 404
OPERATING INCOME 6 035 5 517
OTHER INCOME 124 1 944
INCOME BEFORE INTEREST CHARGES 6 159 7 461
INTEREST CHARGES
Long-term debt 1 978 2 049
Other interest charges 391 473
Allowance for borrowed funds
used during construction (27) (30)
2 342 2 492
NET INCOME 3 817 4 969
RETAINED EARNINGS -
Beginning of period 52 620 52 070
Dividends on common stock - (3 838)
RETAINED EARNINGS -
End of period $56 437 $53 201
See accompanying notes.
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CANAL ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Dollars in Thousands)
(Unaudited)
1997 1996
OPERATING ACTIVITIES
Net income $ 3 817 $ 4 969
Effects of noncash items -
Depreciation and amortization 6 273 5 707
Deferred income taxes and investment
tax credits, net (439) (411)
Earnings from corporate joint venture (117) (136)
Dividends from corporate joint venture 241 -
Change in working capital, exclusive of cash
and interim financing 3 594 (2 361)
All other operating items (264) (716)
Net cash provided by operating activities 13 105 7 052
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (953) (1 754)
Allowance for borrowed funds used
during construction (27) (30)
Net cash used for investing activities (980) (1 784)
FINANCING ACTIVITIES
Payment of short-term borrowings (11 175) (13 850)
Payment of dividends - (3 838)
Advances from (payments to) affiliates (950) 12 605
Sinking fund payments - (184)
Net cash used for financing activities (12 125) (5 267)
Net increase in cash - 1
Cash at beginning of period 12 12
Cash at end of period $ 12 $ 13
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 1 880 $2 072
Income taxes $ 604 $2 335
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.
The Company has 114 regular employees including 87 (76%) represented
by a collective bargaining agreement that was scheduled to expire in May
1997. During the quarter, a new agreement was reached that will remain in
effect through June 1, 2001.
The Company is a wholesale power company and operates two generating
units under life-of-the-unit power contracts on file with the FERC. The
price of power 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.
(2) Significant Accounting Policies
(a) Principles of Accounting
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,
1997 and 1996, 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's significant accounting policies are described in Note 2
of Notes to Financial Statements included in its 1996 Annual Report on Form
10-K filed with the Securities and Exchange Commission. For interim
reporting purposes, the Company follows these same basic accounting
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.
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CANAL ELECTRIC COMPANY
(b) Regulatory Assets
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. Effective January
1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS
No. 121 imposes stricter criteria for regulatory assets by requiring that
such assets be probable of future recovery at each balance sheet date.
SFAS No. 121 did not have an impact on the Company's financial position
upon adoption. This result may change as modifications are made to the
current regulatory framework due to ongoing electric utility restructuring
efforts in Massachusetts. For additional information relating to electric
industry restructuring, see 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)
Deferred income taxes $13 638 $13 597
Seabrook related costs 5 443 6 262
Total regulatory assets $19 081 $19 859
(3) Commitments and Contingencies
Construction
The Company is engaged in a continuous construction program presently
estimated at $68.2 million for the five-year period 1997 through 2001. Of
that amount, $20 million is estimated for 1997. As of March 31, 1997,
construction expenditures, including an allowance for funds used during
construction, amounted to approximately $1 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, 1997 and 1996 and unit sales for these periods is shown below:
Three Months
Ended March 31,
1997 and 1996
Increase (Decrease)
(Dollars in Thousands)
Electric Operating Revenues $ 13 765 28.7%
Operating Expenses -
Fuel used in production 12 917 56.3
Electricity purchased for resale 735 37.9
Other operation and maintenance (352) (3.9)
Depreciation 519 11.4
Taxes -
Federal and state income (543) (17.6)
Local property and other (29) (3.1)
13 247 31.2
Operating Income 518 9.4
Other Income (1 820) (93.6)
Income Before Interest Charges (1 302) (17.4)
Interest Charges (150) (6.0)
Net Income $ (1 152) (23.2)
Unit Sales (MWH) Increase 594 915 70.0
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, 1997 981 702 298 701 75 841 88 414 1 444 658
March 31, 1996 571 299 135 094 66 651 76 699 849 743
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CANAL ELECTRIC COMPANY
Revenue, Fuel and Purchased Power
Operating revenues for the first quarter of 1997 increased $13.8
million or 28.7% due primarily to the significant increase in unit sales
that reflects the increased availability of Units 1 and 2 due to the timing
of both scheduled and unscheduled maintenance. The increase in unit sales
during the quarter also reflects a higher level of purchases made on behalf
of affiliated retail distribution companies and an increase in power from
Seabrook.
The significant increase in fuel used in production reflects the
impact of the increased availability of Units 1 and 2, offset in part by
the lower average cost of oil. Fuel, purchased power and transmission
costs represented approximately 64% and 54% of operating revenues in the
first quarter of 1997 and 1996, respectively, and averaged 2.7 cents per
KWH in the current period as compared to 3 cents per KWH for the
corresponding period a year ago.
Other Operating Expenses
Other operation and maintenance decreased by 3.9% due primarily to
lower postretirement benefits costs ($228,000). The 11.4% increase in
depreciation expense reflects a higher level of plant-in-service. Federal
and state income taxes decreased due to a lower level of pretax income.
Other Income and Interest Charges
The significant decrease in other income during the current three-
month period was primarily due to the absence of the 1996 reversal of a
reserve for costs associated with postretirement benefits (approximately
$1.8 million) 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 decreased 6% during the quarter due to lower
long-term interest reflecting the retirement of Series A First Mortgage
Bonds during the second quarter of 1996 and a lower average level of short-
term borrowings.
Electric Industry Restructuring
In August 1995, the DPU issued an order calling for the restructuring
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 Massachu-
setts. 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.
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CANAL ELECTRIC COMPANY
The Company has FERC-approved power contracts in effect with various
retail electric utilities (including certain affiliates). The retail
electric utilities with whom the Company has power contracts are directly
affected by the state's electric industry restructuring order. The Company
believes that it will continue to collect the costs associated with these
FERC-approved power contracts. However, the auction process discussed
below could have an impact on these contractual obligations in the future.
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.
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
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
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CANAL ELECTRIC COMPANY
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 (including the Company's Units 1 and 2) 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 mitigation.
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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, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended March
31, 1997.
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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, 1997
<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, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000016906
<NAME> CANAL ELECTRIC COMPANY
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<TOTAL-ASSETS> 336,626
<COMMON> 38,080
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