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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-30057
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, 1998
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, 1998 AND DECEMBER 31, 1997
ASSETS
(Dollars in thousands)
March 31, December 31,
1998 1997
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost $470,037 $469,861
Less - Accumulated depreciation and
amortization 202,994 197,844
267,043 272,017
Add - Construction work in progress 2,546 2,228
Nuclear fuel in process 309 193
269,898 274,438
INVESTMENTS
Equity in corporate joint venture 3,085 3,075
CURRENT ASSETS
Cash 18 18
Accounts receivable-
Affiliates 8,410 12,159
Other 7,759 15,397
Electric production fuel oil 620 806
Prepaid property taxes 420 840
Other 2,444 2,277
19,671 31,497
DEFERRED CHARGES
Regulatory assets 17,125 17,413
Other 9,731 9,774
26,856 27,187
$319,510 $336,197
See accompanying notes.
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CANAL ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
March 31, December 31,
1998 1997
(Unaudited)
CAPITALIZATION
Common Equity -
Common stock, $25 par value -
Authorized - 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 56,700 53,130
103,101 99,531
Long-term debt, including premiums, less
current sinking fund requirements 83,917 83,917
187,018 183,448
CAPITAL LEASE OBLIGATIONS 11,085 11,227
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 9,200 20,850
Advances from affiliates 575 -
9,775 20,850
Other Current Liabilities -
Current sinking fund requirements 350 350
Accounts payable -
Affiliates 1,285 1,028
Other 10,259 21,335
Accrued taxes -
Income 3,941 2,054
Local property and other 772 844
Capital lease obligations 573 574
Accrued interest and other 6,406 6,174
23,586 32,359
33,361 53,209
DEFERRED CREDITS
Accumulated deferred income taxes 69,198 69,447
Unamortized investment tax credits and other 18,848 18,866
88,046 88,313
COMMITMENTS AND CONTINGENCIES
$319,510 $336,197
See accompanying notes.
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CANAL ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands - Unaudited)
1998 1997
ELECTRIC OPERATING REVENUES
Sales to affiliated companies $28,920 $34,310
Sales to non-affiliated companies 19,327 27,376
48,247 61,686
OPERATING EXPENSES
Fuel used in production 25,768 35,878
Electricity purchased for resale 148 2,672
Other operation and maintenance 8,718 8,596
Depreciation 5,039 5,065
Taxes -
Income 2,064 2,542
Local property 696 670
Payroll and other 217 228
42,650 55,651
OPERATING INCOME 5,597 6,035
OTHER INCOME 129 124
INCOME BEFORE INTEREST CHARGES 5,726 6,159
INTEREST CHARGES
Long-term debt 1,978 1,978
Other interest charges 178 364
2,156 2,342
NET INCOME 3,570 3,817
RETAINED EARNINGS -
Beginning of period 53,130 52,620
Dividends on common stock - -
RETAINED EARNINGS -
End of period $56,700 $56,437
See accompanying notes.
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CANAL ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands - Unaudited)
1998 1997
OPERATING ACTIVITIES
Net income $ 3,570 $ 3,817
Effects of noncash items -
Depreciation and amortization 5,614 6,273
Deferred income taxes and investment
tax credits, net (461) (439)
Earnings from corporate joint venture (117) (117)
Dividends from corporate joint venture 107 241
Change in working capital, exclusive of cash
and interim financing 3,053 3,594
All other operating items 62 (264)
Net cash provided by operating activities 11,828 13,105
INVESTING ACTIVITIES
Additions to property, plant and equipment (753) (980)
FINANCING ACTIVITIES
Payment of short-term borrowings (11,650) (11,175)
Advances from (payments to) affiliates 575 (950)
Net cash used for financing activities (11,075) (12,125)
Net increase in cash - -
Cash at beginning of period 18 12
Cash at end of period $ 18 $ 12
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 1,673 $ 1,880
Income taxes $ 598 $ 604
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 nonregulated companies.
The Company has 106 regular employees including 79 (75%) represented
by a collective bargaining agreement that will remain in effect through
May 31, 2001. Employee relations have generally been satisfactory.
The Company is a wholesale power company and operates two generating
units under life-of-the-unit power contracts on file with the Federal
Energy Regulatory Commission (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 re-
covery 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,
1998 and 1997, reflect, in the opinion of the Company, all adjustments
(consisting of only normal recurring accruals) necessary to summarize
fairly the results for such periods. In addition, certain prior period
amounts are reclassified from time to time to conform with the presenta-
tion used in the current period's financial statements.
The Company's significant accounting policies are described in Note 2
of Notes to Financial Statements included in its 1997 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. For interim
reporting purposes, the Company follows these same basic accounting
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 FERC and the Massachusetts Department
of Telecommunications and Energy (DTE).
Based on the current regulatory framework, the Company accounts for
the economic effects of regulation in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting
for the Effects of Certain Types of Regulation." The Company has
established various regulatory assets in cases where the FERC has
permitted or is expected to permit recovery of specific costs over time.
In the event the criteria for applying SFAS No. 71 are no longer met, the
accounting impact would be an extraordinary, non-cash charge to opera-
tions of an amount that could be material. Criteria that give rise to
the discontinuance of SFAS No. 71 include: 1) increasing competition
restricting the Company's ability to establish prices to recover specific
costs, and 2) a significant change in the current manner in which rates
are set by regulators from cost based regulation to another form of
regulation. These criteria are reviewed on a regular basis to ensure the
continuing application of SFAS No. 71 is appropriate. Based on the
current evaluation of the various factors and conditions that are
expected to impact future cost recovery, the Company believes that its
regulatory assets are probable of future recovery.
The principal regulatory assets included in deferred charges were as
follows:
March 31, December 31,
1998 1997
(Dollars in thousands)
Deferred income taxes $13,130 $13,089
Seabrook related costs 3,995 4,324
$17,125 $17,413
In November 1997, the Commonwealth of Massachusetts enacted a
comprehensive electric utility industry restructuring bill. On November
19, 1997, the Company, together with Cambridge Electric Light Company
(Cambridge) and Commonwealth Electric Company (Commonwealth) filed a
restructuring plan with the DTE. The plan, approved by the DTE on
February 27, 1998, describes the process by which Commonwealth and
Cambridge will, beginning March 1, 1998, initiate a ten percent rate
reduction for all customer classes and allow customers to choose their
energy supplier. As part of the plan, the DTE authorized the recovery
of certain strandable costs. The legislation gives the DTE the authority
to determine the amount of strandable costs that will be eligible for
recovery. Costs that will qualify as strandable costs and be eligible
for recovery include, but are not limited to, certain above market costs
associated with generating facilities, costs associated with long-term
commitments to purchase power at above market prices from independent
power producers and regulatory assets and associated liabilities related
to the generation portion of the electric business.
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CANAL ELECTRIC COMPANY
The cost of transitioning to competition will be mitigated, in part,
through the divestiture of the system's non-nuclear generating assets,
including the Company's Units 1 and 2, in an auction process that is
expected to be completed in 1998. Any net proceeds in excess of book
value received from the divestiture of these assets will be used to
mitigate stranded costs. For additional information relating to electric
industry restructuring, see Management's Discussion and Analysis of
Results of Operations.
(3) Commitments and Contingencies
Construction
The Company is engaged in a continuous construction program presently
estimated at $19.3 million for the five-year period 1998 through 2002.
Of that amount, $10.5 million is estimated for 1998. As of March 31,
1998, construction expenditures, including an allowance for funds used
during construction, amounted to approximately $750,000. These estimates
include expenditures related to Units 1 and 2 which are likely to be sold
at auction in 1998 pursuant to the restructuring plan approved by the
DTE. 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 expendi-
tures 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, 1998 and 1997 and unit sales for these periods is shown below:
Three Months
Ended March 31,
1998 and 1997
Increase (Decrease)
(Dollars in thousands)
Electric Operating Revenues $(13,439) (21.8)%
Operating Expenses -
Fuel used in production (10,110) (28.2)
Electricity purchased for resale (2,524) (94.5)
Other operation and maintenance 122 1.4
Depreciation (26) (0.5)
Taxes -
Federal and state income (478) (18.8)
Local property and other 15 1.7
(13,001) (23.4)
Operating Income (438) (7.3)
Other Income 5 4.0
Income Before Interest Charges (433) (7.0)
Interest Charges (186) (7.9)
Net Income $ (247) (6.5)
Unit Sales (MWH) Decrease (121,715) (8.4)
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, 1998 895,231 356,160 - 71,552 1,322,943
March 31, 1997 981,702 298,701 75,841 88,414 1,444,658
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CANAL ELECTRIC COMPANY
Revenue, Fuel and Purchased Power
Operating revenues for the first three months of 1998 decreased $13.4
million or 21.8%, due primarily to an 8.4% decrease in unit sales. The
decrease in unit sales reflects the decreased availability of Unit 1 and
Seabrook together with the expiration of contracts for the purchase of
electricity on behalf of affiliated retail distribution companies, offset,
somewhat, by the increased availability of Unit 2.
The significant decrease in fuel used in production of $10.1 million, or
28.2% during the first quarter reflects the lower average cost of fuel oil and
the decreased availability of Unit 1. Fuel, purchased power and transmission
costs represented approximately 55% and 64% of operating revenues in the first
quarter of 1998 and 1997, respectively, and averaged 2 cents per KWH in the
current period as compared to 2.7 cents for the corresponding period a year
ago.
Other Operating Expenses
Other operation and maintenance increased by $122,000 or 1.4% reflecting
an increase in maintenance ($358,000) primarily related to Unit 1, offset, in
part, by a decrease in other operation ($236,000) due primarily to lower
insurance and benefits costs. Federal and state income taxes decreased due to
a lower level of pre-tax income.
Interest Charges
Total interest charges decreased for the current quarter due to a lower
average level of short-term borrowings.
Electric Industry Restructuring
On November 25, 1997, the Governor of Massachusetts signed into law the
Electric Industry Restructuring Act (the Act). Provisions of this legislation
include, among other things, a 10 percent discount on standard offer service
and retail choice of energy supplier effective March 1, 1998, with a subse-
quent increase in the discount on standard offer service of up to 15 percent
upon completion of divestiture of non-nuclear generating assets and possible
securitization of net non-mitigable stranded costs; and, recovery of stranded
costs subject to review and an audit process.
The Company, together with retail affiliates Cambridge and Commonwealth,
filed a comprehensive electric restructuring plan with the DTE in November
1997, that was substantially approved by the DTE in February 1998. While the
system is encouraged with the treatment afforded stranded or transition cost
recovery by the legislation and the DTE, the mandated retail customer discount
could have a significant impact on future cash flows of the retail subsidiar-
ies.
It is now likely that a referendum will appear on the ballot in November
of this year that is seeking to repeal the legislation. The Company's
management is unable to predict what the ultimate outcome of this challenge
will be.
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CANAL ELECTRIC COMPANY
Auction Process
In March 1997, the Company together with Cambridge and Commonwealth
submitted a report to the DTE that detailed the proposed auction process for
selling their electric generation assets and entitlements. The process
included a standard sealed-bid auction for generation assets (including the
Company's Units 1 and 2) and entitlements from purchased power contracts of
Cambridge and Commonwealth. The auction process provided a market-based
approach to maximizing stranded cost mitigation and minimizing the transition
costs that retail customers will have to pay for stranded cost recovery. A
request for bids from interested parties was issued last August followed by an
Offering Memorandum in October. Potential bidders examined all pertinent
information related to the generating facilities and purchased power agree-
ments in order to prepare and submit their first round of bids in mid-Decem-
ber. In January 1998, the Companies selected a short list of potential
bidders, each of whom submitted a final binding bid on May 8, 1998. The
ultimate selection of the winning bidder or bidders is expected to be made
after a two-week evaluation period. The closing process and the required
regulatory filings are expected to be completed in 1998.
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 installa-
tion of expensive air and water pollution control equipment. These regula-
tions have had an impact on the Company's operations in the past and could
have an impact on future operations, capital costs and construction schedules
of major facilities. However, the Company's electric generating facilities
are likely to be sold at auction in 1998 pursuant to the restructuring plan
approved by the DTE.
Year 2000
The Company has been involved in Year 2000 compliancy since 1996. A
complete inventory and review of software, information processing and delivery
systems has been completed, and work continues on computer systems wherever
necessary. While some computer systems have already been updated, tested and
placed in production, the Company expects to complete the balance of the
modifications by early 1999.
Costs associated with Year 2000 compliancy are being expensed as incurred.
The total cost of this project is expected to be funded with internally
generated funds.
Management believes that with appropriate modifications, the Company will
be fully compliant regarding all Year 2000 issues and will continue to provide
its products and services uninterrupted through the millennium change.
Failure to become fully compliant could have a significant impact on the
Company's operations.
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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, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended March
31, 1998.
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CANAL ELECTRIC COMPANY
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANAL ELECTRIC COMPANY
(Registrant)
Principal Financial Officer:
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Date: May 15, 1998
<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, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000016906
<NAME> CANAL ELECTRIC COMPANY
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