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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549-1004
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
None
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 March 16, 1998
Common Stock, $25 par value 1,523,200 shares
The Company meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form 10-K as a wholly-owned subsidiary and is therefore filing this
Form with the reduced disclosure format.
Documents Incorporated by Reference Part in Form 10-K
None Not Applicable
List of Exhibits begins on page 34 of this report.
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CANAL ELECTRIC COMPANY
FORM 10-K DECEMBER 31, 1997
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business.......................................... 3
General......................................... 3
ISO - New England............................... 3
Regulation...................................... 4
Fuel Supply..................................... 4
Power Contracts................................. 5
Power Supply Commitments and
Support Agreements............................ 6
Construction and Financing...................... 6
Employees....................................... 6
Item 2. Properties........................................ 6
Item 3. Legal Proceedings................................. 7
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters..................... 8
Item 7. Management's Discussion and Analysis of
Results of Operations........................... 9
Item 8. Financial Statements and Supplementary Data....... 13
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 13
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................. 34
Signatures................................................... 42
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CANAL ELECTRIC COMPANY
Part I.
Item 1. Business
General
Canal Electric Company (the Company) is a wholesale electric generating
company organized in 1902 under the laws of the Commonwealth of Massachu-
setts. The Company assumed its present corporate name in 1966 after the
sale to an affiliated company of its electric distribution and transmission
properties together with the right to do business in the territories served.
The Company is a wholly-owned subsidiary of Commonwealth Energy System
("System"), which together with its subsidiaries is collectively referred to
as "the system."
The Company's generating station is located in Sandwich, Massachusetts
at the eastern end of the Cape Cod Canal. The station consists of two
electric generating units: Canal Unit 1 is an oil-fired facility with a
rated capacity of 569 MW, wholly-owned by the Company; and Canal Unit 2
which was converted to dual-fuel capability (oil and natural gas) in 1996,
with a rated capacity of 580 MW, jointly-owned by the Company and Montaup
Electric Company (Montaup) (an unaffiliated company). Canal Unit 2 is
operated by the Company under an agreement with Montaup which provides for
the equal sharing of output, fixed charges and operating expenses. Canal
Units 1 and 2 commenced operation in 1968 and in 1976, respectively.
The Company's generating assets together with capacity entitlements
associated with power contracts as further discussed later in this section
are part of an ongoing auction process initiated during 1997 in response to
electric industry restructuring legislation enacted in Massachusetts in
November 1997. The auction process is expected to be completed in 1998.
For further information refer to the "Industry Restructuring" section of
Management's Discussion and Analysis of Results of Operation filed under
Item 7 of this report.
The Company also has a 3.52% interest in the Seabrook 1 nuclear power
plant located in Seabrook, New Hampshire, to provide for a portion of the
capacity and energy needs of Cambridge Electric Light Company (Cambridge)
and Commonwealth Electric Company (Commonwealth Electric), each of which are
retail distribution companies and wholly-owned subsidiaries of the System.
The plant has a rated capacity of 1,150 MW. The Seabrook entitlement is
also part of the aforementioned auction.
For additional information pertaining to the Company's relationship with
the system's retail distribution companies, together with more extensive
information on the Company's participation in the Seabrook plant and on
other sources of power procurement, refer to the "Power Contracts" and
"Power Supply Commitments and Support Agreements" sections of this Item 1.
ISO - New England
The Company, together with other electric utility companies in the New
England area, is a member of ISO - New England (formerly the New England
Power Pool), which was formed in 1971 to provide for the joint planning and
operation of electric systems throughout New England.
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CANAL ELECTRIC COMPANY
ISO - New England operates a centralized dispatching facility to ensure
reliability of service and to dispatch the most economically available
generating units of the member companies to fulfill the region's energy
requirements. This concept is accomplished by use of computers to monitor
and forecast load requirements. In the past, this has required that Canal
Unit 1 operate whenever possible since it is one of the most efficient oil-
fired units in the country. Canal Unit 2 is designed for cycling operation
which provides for economic changes in unit load permitting reduced genera-
tion during nights and weekends when demand is lowest. It has performed as
one of New England's most efficient units in this type of service.
The Company and the System's other electric subsidiaries are also
members of the Northeast Power Coordinating Council (NPCC), an advisory
organization which includes the major power systems in New England and New
York plus the provinces of Ontario and New Brunswick in Canada. NPCC
establishes criteria and standards for reliability and serves as a vehicle
for coordination in the planning and operation of these systems.
Regulation
As more fully discussed in "Management's Discussion and Analysis of
Results of Operations" in Item 7 of this report, the Company began to
implement the provisions of the Electric Industry Restructuring Act on March
1, 1998 as signed into law on November 25, 1997, following the Company's
filing of its proposed restructuring plan with the DTE on November 19, 1997.
A modified plan was approved by the DTE on February 27, 1998 prior to
implementation on March 1, 1998.
Fuel Supply
Effective March 15, 1998, the Company executed a one-year contract with
Coastal Refining and Marketing Inc. (Coastal) for the purchase of 1% sulfur
residual fuel oil. The contract provides for delivery of a set percentage
of the Company's fuel requirement, the balance (a maximum of 50%) to be met
by spot purchases or by Coastal at the discretion of the Company.
Energy Supply and Credit Corporation (ESCO Massachusetts, Inc.) operates
the Company's fuel oil terminal and manages the receipt and payment for fuel
oil under assignment of the Company's supply contracts to ESCO Massachu-
setts, Inc. Residual fuel oil in the terminal's shore tanks is held in
inventory by ESCO Massachusetts, Inc. and delivered upon demand to the
Company's two day tanks.
Fuel oil storage facilities at the Canal site have a capacity of
1,199,000 barrels, representing approximately 60 days of normal operation of
the two units. During 1997, ESCO Massachusetts, Inc. maintained an average
daily inventory of 395,000 barrels of fuel oil which represents 18 days of
normal operation of the two units. This supply is maintained by tanker
deliveries.
During 1996, Unit 2 was converted to dual-fuel capability, residual fuel
oil and natural gas. Unit 2 has burned approximately 2.5 million MMBTU's of
natural gas since the conversion was completed during periods when the use
of natural gas was the most economical choice. The Company anticipates that
its dual-fuel capability will result in future savings as the least<PAGE>
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CANAL ELECTRIC COMPANY
expensive fuel is utilized.
The Company has a gas supply contract with PGE Energy Trading
Corporation to provide 100% of the natural gas requirements of Unit 2
through October 31, 1998. The Company's original gas supply contract with
Duke/Louis Dreyfus, L.L.C. expired on December 31, 1997.
The nuclear fuel contract and inventory information for Seabrook 1 has
been furnished to the Company by North Atlantic Energy Services Corporation
(NAESCO), the plant manager responsible for operation of the unit.
Seabrook's requirement for nuclear fuel components are 100% covered through
1999 by existing contracts.
There are no spent fuel reprocessing or disposal facilities currently
operating in the United States. Instead, commercial nuclear electric gener-
ating units operating in the United States are required to retain spent fuel
on-site. As required by the Nuclear Waste Policy Act of 1982 (the Act), as
amended, the joint-owners entered into a contract with the Department of
Energy for the transportation and disposal of spent fuel and high level
radioactive waste at a national nuclear waste repository or Monitored
Retrievable Storage (MRS) facility. Owners or generators of spent nuclear
fuel or its associated wastes are required to bear the costs for such
transportation and disposal through payment of a fee of approximately 1
mill/KWH based on net electric generation to the Nuclear Waste Fund. Under
the Act, a storage or disposal facility for nuclear waste was anticipated to
be in operation by 1998; a reassessment of the project's schedule requires
extending the completion date of the permanent facility until at least 2010.
Seabrook 1 is currently licensed for enough on-site storage to accommodate
spent fuel expected to be accumulated through at least the year 2010.
Power Contracts
The Company is a party to substantially identical life-of-the-unit power
contracts with Boston Edison Company, Montaup Electric Company and New
England Power Company (unaffiliated utilities), under which each is
severally obligated to purchase one-quarter of the capacity and energy of
Canal Unit 1. Commonwealth Electric and Cambridge are jointly obligated to
purchase the remaining one-quarter of the unit's capacity and energy.
Similar contracts are in effect between the Company and Commonwealth
Electric and Cambridge under which those companies are jointly obligated to
purchase the Company's entire share of the capacity and energy of Canal Unit
2. 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 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 power contracts are on file with the FERC.
The Company acts as agent for Commonwealth Electric and/or Cambridge in
the procurement of additional capacity, or, to sell a portion of each com-
pany's entitlement in Unit 2. Exchange agreements are in place with several
utilities whereby, in certain circumstances, it is possible to exchange
capacity so that the mix of power improves the pricing for dispatch for both
the seller and purchaser. Commonwealth Electric and Cambridge thus secure
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CANAL ELECTRIC COMPANY
cost savings for their respective customers by planning for bulk power
supply on a single system basis. A Capacity Acquisition and Disposition
Agreement, which has been accepted for filing as a rate schedule by the
FERC, enables the Company to recover costs incurred in connection with any
transaction covered by such Agreement. Commonwealth Electric and Cambridge,
in turn, bill charges to retail customers through rates subject to DTE
regulation. Currently, Agreements are in effect for Seabrook 1 and Phases I
and II of the Hydro-Quebec Project.
Power Supply Commitments and Support Agreements
In response to solicitations by Northeast Utilities and other utilities,
the Company, on behalf of Commonwealth Electric and Cambridge, purchased
entitlements through short-term contracts in various selected generating
units. These and other bulk electric power purchases are necessary in order
to fulfill the system's ISO - New England obligation and for the Company to
acquire and deliver electric generating capacity to meet Commonwealth
Electric and Cambridge requirements. For additional information, refer to
"Transactions with Affiliates" in Note 2(c) of Notes to Financial Statements
and to "Management's Discussion and Analysis of Results of Operations" filed
under Items 8 and 7, respectively, of this report.
The Company is party to support agreements for Phases I and II of the
Hydro-Quebec Project and is thereby obligated to pay its share of operating
and capital costs for Phase II over a 25 year period ending in 2015. Future
minimum lease payments for Phase II have an estimated present value of $11.8
million at December 31, 1997. In addition, the Company has an equity
interest in Phase II which amounted to $3.1 million in 1997 and $3.3 million
in 1996.
Construction and Financing
Information concerning the Company's financing and construction programs
is contained in Note 5 of Notes to Financial Statements filed under Item 8
of this report.
Employees
The Company has 106 regular employees, 79 (75%) are represented by the
Utility Workers' Union of America, A.F.L.-C.I.O. The existing collective
bargaining agreement expires on May 31, 2001. Employee relations have
generally been satisfactory.
Item 2. Properties
The Company operates a generating station located at the eastern end of
the Cape Cod Canal in Sandwich, Massachusetts. The station consists of two
steam electric generating units: Canal Unit 1 with a rated capacity of
569 MW, wholly-owned by the Company; and Canal Unit 2, with a rated capacity
of 580 MW, jointly-owned by the Company and Montaup Electric Company, a
wholly-owned subsidiary of Eastern Utilities Associates. In addition, the
Company has a 3.52% joint-ownership interest (40.5 MW of capacity) in
Seabrook 1. Refer to Note 4 of Notes to Financial Statements filed under
Item 8 of this report for encumbrances relative to the Company's property.
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CANAL ELECTRIC COMPANY
On March 31, 1997, the Company, Cambridge and Commonwealth Electric
submitted a report to the DTE that detailed the proposed auction process for
selling their non-nuclear electric generation assets and entitlements. The
process included a standard, sealed-bid auction for generation assets and
purchased power contracts. This auction process provides a market-based
approach to maximizing stranded cost mitigation and minimizing the
transition charges that ratepayers of Cambridge and Commonwealth Electric
will have to pay for stranded cost recovery. A request for bids from
interested parties was issued during August, and an Offering Memorandum was
issued in October. Potential bidders examined all pertinent information
related to the Company's generating facilities and purchased power
agreements in order to prepare and submit their first round of bids in mid-
December. In January 1998, the Company selected a short list of potential
bidders, each of whom are expected to submit a final binding bid in the
second quarter of 1998. The entire process, including regulatory approvals,
is expected to be completed in 1998.
Item 3. Legal Proceedings
The Company is subject to legal claims and matters arising from its
normal course of business, including its ownership interest in the Seabrook
plant.
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CANAL ELECTRIC COMPANY
PART II.
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
(a) Principal Market
Not applicable. The Company is a wholly-owned subsidiary of
Commonwealth Energy System.
(b) Number of Shareholders at December 31, 1997
One
(c) Frequency and Amount of Dividends Declared in 1997 and 1996
1997 1996
Per Share Per Share
Declaration Date Amount Declaration Date Amount
April 25, 1997 $ 2.50 January 24, 1996 $ 2.52
July 21, 1997 2.40 April 29, 1996 3.25
October 27, 1997 2.35 July 30, 1996 2.50
December 22, 1997 2.15 November 4, 1996 2.25
$ 9.40 $10.52
Reference is made to Note 6 of Notes to Financial Statements filed
under Item 8 of this report for restrictions against the payment of
cash dividends.
(d) Future dividends may vary depending upon the Company's earnings and
capital requirements as well as financial and other conditions
existing at that time.
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CANAL ELECTRIC COMPANY
Item 7. 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 Statements of Income and is presented to
facilitate an understanding of the results of operations. This discussion
should be read in conjunction with the Notes to Financial Statements filed
under Item 8 of this report.
A summary of the period to period changes in the principal items
included in the Statements of Income for the years ended December 31, 1997 and
1996 is shown below:
Years Ended Years Ended
December 31, December 31,
1997 and 1996 1996 and 1995
Increase (Decrease)
(Dollars in thousands)
Electric Operating Revenues $ 28 573 15.4 % $ 39 565 27.1 %
Operating Expenses:
Fuel used in production 36 192 45.7 30 414 62.4
Electricity purchased for resale (2 875) (33.9) (6 523) (43.5)
Other operation and maintenance (3 844) (9.2) 2 728 7.0
Depreciation 532 2.8 2 209 13.4
Taxes -
Federal and state income (542) (5.6) 9 911 1 496.1
Local property and other 209 6.3 (181) (5.2)
29 672 18.4 37 758 30.6
Operating Income (1 099) (4.5) 1 807 8.0
Other Income (1 925) (80.4) 1 163 94.6
Income Before Interest Charges (3 024) (11.3) 2 970 12.4
Interest Charges (1 278) (12.4) 528 5.4
Net Income $ (1 746) (10.5) $ 2 442 17.3
Unit Sales Increase
(Decrease) (MWH) 1 583 582 49.9 795 899 33.5
The following is a summary of unit sales for the periods indicated:
Unit Sales (MWH)
Period Ended Seabrook Purchased
December 31, Unit 1 Unit 2 Unit 1 For Resale Total
1997 3 219 542 1 098 463 279 941 159 914 4 757 860
1996 2 104 132 455 054 345 204 269 888 3 174 278
1995 942 574 830 827 295 264 309 714 2 378 379
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CANAL ELECTRIC COMPANY
Revenue, Fuel and Purchased Power
During 1997, operating revenues increased 15.4% or $28.6 million
primarily due to a 50% increase in unit sales. The significant increase in
unit sales reflects the increased availability of Units 1 and 2 due to the
timing of both scheduled and unscheduled maintenance. Somewhat offsetting
these items was a decrease in power available from Seabrook 1 due to the
timing of a refueling outage and a lower level of purchases made on behalf
of affiliated retail distribution companies.
Operating revenues for 1996 increased by nearly $39.6 million or 27.1%
due to a 33.5% increase in unit sales. The significant increase in unit
sales was primarily due to the increased availability of Unit 1 which was
out of service for approximately eight months in 1995 due to a combination
of scheduled and unscheduled maintenance and an increase in power available
from Seabrook 1. Somewhat offsetting the increase in unit sales was the
decreased availability of Unit 2 which returned to service in August 1996
following approximately five months of scheduled maintenance and a lower
level of purchases made on behalf of affiliated retail distribution
companies.
The significant increases in fuel used in production reflect the
increased availability of Units 1 and 2 as discussed above, partially offset
during 1997 by a decrease in the average cost of oil, while 1996 reflected
an increase in the average cost of oil. Fuel, purchased power and
transmission costs (included in other operation) represented approximately
58% of the total revenue dollar in 1997, 49% in 1996 and 46% in 1995 and
averaged 2.61 cents per KWH in 1997 as compared to 2.86 cents in 1996 and
2.83 cents in 1995.
Other Operating Expenses
Other operation decreased approximately $2.3 million or 7.6% and
increased approximately $3.4 million or 12.8% in 1996. The decrease in 1997
was primarily due to the absence of amortization related to postretirement
benefits costs reflecting the Federal Energy Regulatory Commission's
approval of rate schedules which allowed the recovery of previously deferred
costs ($1.8 million) over a six-month period which began in March 1996. The
increase in 1996 was primarily due to higher postretirement benefits costs
reflecting the amortization of previously deferred costs as discussed above.
Also contributing to the increase in 1996 was greater liability insurance
costs ($800,000) due to the absence of adjustments made to the insurance
accruals during 1995 reflecting better than anticipated experience.
The 13.2% decrease in maintenance expense in 1997 reflects lower
maintenance costs associated with Units 1 and 2 ($2.9 million), offset in
part by increased maintenance costs at Seabrook 1 ($1.4 million) reflecting
a scheduled refueling outage. The 5.5% decrease in maintenance expense
during 1996 reflects lower maintenance costs associated with Unit 1 ($1.5
million), offset in part by increased maintenance costs for Unit 2 ($1.2
million).
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CANAL ELECTRIC COMPANY
Depreciation and Taxes
Depreciation increased in 1997 due to a higher level of plant-in-service
reflecting the conversion of Unit 2 to burn both gas and oil. During 1996
depreciation increased due to the higher level of plant-in-service.
Income tax expense declined 5.6% or approximately $500,000 in 1997 due
to a lower level of pre-tax income Federal and state income taxes increased
in 1996 due to the absence of a tax adjustment during the second quarter of
1995 that related to the settlement of certain Seabrook-related income tax
issues ($7.5 million) and a higher level of pre-tax income.
Other Income
The change in other income during 1997 was due to the absence of the
1996 reversal of a reserve for costs associated with postretirement benefits
(approximately $1.8 million) following FERC approval. The change in other
income during 1996 reflects the reversal of the aforementioned reserve.
Interest Charges
During 1997, total interest charges decreased by approximately $1.3
million or 12.4% primarily due to a decrease in short-term interest
($1,106,000) reflecting a lower average level of short-term debt. The
decrease in interest charges also includes lower long-term interest
($106,000) reflecting the retirement of Series A $19 million (7%) First
Mortgage Bonds during the second quarter of 1996. Total interest charges
increased 5.4% in 1996 reflecting an increase in short-term interest
($459,000) due to a higher average level of short-term borrowings coupled
with a decrease in the debt component of allowance for funds used during
construction ($281,000), partially offset by lower long-term interest
($213,000) reflecting the retirement of Series A First Mortgage Bonds during
the second quarter.
Forward-Looking Statements
This report contains statements which, to the extent they are not
recitations of historical fact, constitute "forward-looking statements" and
are intended to be subject to the safe harbor protection provided by the
Private Securities Litigation Reform Act of 1995. A number of important
factors affecting the Company's business and financial results could cause
actual results to differ materially from those stated in the forward-looking
statements or projected amounts. Those factors include developments in the
legislative, regulatory and competitive environment, certain environmental
matters, demands for capital expenditures and the availability of cash from
various sources.
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 subsequent increase in the discount on standard offer service of up
to 15 percent upon completion of divestiture of non-nuclear generating
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CANAL ELECTRIC COMPANY
assets and securitization of net non-mitigable stranded costs; and, recovery
of stranded costs subject to review and an audit process.
The system's electric subsidiaries including the Company, together with
retail affiliates Cambridge Electric Company and Commonwealth Electric
Company, filed a comprehensive electric restructuring plan with the DTE on
November 19, 1997 that was thoroughly reviewed in five separate hearings
that solicited public comment, and seven days of evidentiary hearings that
were completed in February 1998.
Consistent with the Act, the system's plan provides, as of March 1,
1998, a rate reduction of 10 percent for retail customers choosing the
standard service transition rate from the average of undiscounted rates in
effect during August 1997, divestiture of non-nuclear generating assets
(including the Company's Units 1 and 2) and a restructured electric
generation market that is able to offer retail access to all customers. The
system's plan also includes the following provisions: 1) an estimate and
detailed accounting of total transition costs eligible for recovery through
a non-bypassable access or transition charge; 2) a description of the
system's strategies to mitigate transition costs; 3) unbundled rates for
generation, distribution, transmission and other services; 4) proposed
charges for the recovery of transition costs through the non-bypassable
transition charge; 5) proposed programs to provide universal service to all
customers; 6) proposed programs and mandatory charges to promote energy
conservation and demand-side management; 7) procedures for ensuring direct
retail access to all electric generation suppliers; 8) discussions of the
impact of the plan on the system's employees and the communities served by
the system; and (9) a mandatory charge per kwh for all consumers to support
the development and promotion of renewable energy projects.
On February 27, 1998, the DTE approved the system's restructuring plan
stating that the plan complies with the Act. 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 subsidiaries.
Auction Process
On March 31, 1997, the Company together with Cambridge Electric and
Commonwealth Electric (the Companies) submitted a report to the DTE that de-
tailed 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
the purchased power contracts of Cambridge Electric and Commonwealth
Electric. The auction process provides a market-based approach to
maximizing stranded cost mitigation and minimizing the access charges that
retail customers will have to pay for stranded cost recovery. A request for
bids from interested parties was issued during August, and an Offering
Memorandum was issued in October. Potential bidders examined all pertinent
information related to the Companies generating facilities and purchased
power agreements in order to prepare and submit their first round of bids in
mid-December. In January 1998, the Companies selected a short list of
potential bidders, each of whom are expected to submit a final binding bid
in the second quarter of 1998. The entire process, including regulatory
approvals, is expected to be completed in 1998.
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CANAL ELECTRIC COMPANY
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 would continue to have an impact on future operations, capital costs and
construction schedules of major facilities; however, the Company's Units 1
and 2 are likely to be sold as part of the aforementioned auction in 1998
pursuant to the restructuring plan approved by the DTE.
On January 1, 1997, the Company adopted the provisions of Statement of
Position (SOP) 96-1, "Environmental Remediation Liabilities." This
Statement provides authoritative guidance for recognition, measurement,
display and disclosure of environmental remediation liabilities in financial
statements. The adoption of SOP 96-1 did not have a material adverse effect
on the Company's results of operations or financial position.
Year 2000
The Company has been involved in the 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.
Expenditures incurred by the system through 1997 to review existing
computer systems and to modify existing software and applications amounted
to nearly $900,000, and it is estimated that approximately $2.6 million will
be incurred in 1998 and 1999.
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 compliant could have a significant impact on the
Company's operations.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements required by this item are filed
herewith on pages 14 through 33 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None
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CANAL ELECTRIC COMPANY
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Canal Electric Company:
We have audited the accompanying balance sheets of CANAL ELECTRIC
COMPANY, (a Massachusetts corporation and wholly-owned subsidiary of
Commonwealth Energy System) as of December 31, 1997 and 1996, and the related
statements of income, retained earnings and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Canal Electric
Company as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements and schedule is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required
to be set forth therein in relation to the basic financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 19, 1998.
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CANAL ELECTRIC COMPANY
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PART II.
FINANCIAL STATEMENTS
Balance Sheets at December 31, 1997 and 1996
Statements of Income for the Years Ended December 31, 1997, 1996 and 1995
Statements of Retained Earnings for the Years Ended December 31, 1997, 1996
and 1995
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995
Notes to Financial Statements
PART IV.
SCHEDULE
I Investments In, Equity Earnings of, and Dividends Received From
Related Parties for the Years Ended December 31, 1997, 1996 and 1995
SCHEDULES OMITTED
All other schedules are not submitted because they are not applicable or
required or because the required information is included in the financial
statements or notes thereto.
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<PAGE 16>
CANAL ELECTRIC COMPANY
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
(Dollars in thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost $469 861 $464 003
Less - Accumulated depreciation
and amortization 197 844 179 307
272 017 284 696
Add - Construction work in progress 2 228 943
Nuclear fuel in process 193 1 597
274 438 287 236
INVESTMENTS
Equity in corporate joint venture 3 075 3 321
CURRENT ASSETS
Cash 18 12
Accounts receivable -
Affiliated companies 12 159 10 294
Other 15 397 12 390
Unbilled revenues 86 675
Inventories, at average cost -
Electric production fuel oil 806 979
Materials and supplies 1 268 1 296
Prepaid taxes -
Income - 64
Property 840 795
Other 923 1 116
31 497 27 621
DEFERRED CHARGES
Regulatory assets 17 413 19 859
Other 9 774 5 486
27 187 25 345
$336 197 $343 523
The accompanying notes are an integral part of these financial statements.
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CANAL ELECTRIC COMPANY
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
CAPITALIZATION AND LIABILITIES
1997 1996
(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 53 130 52 620
99 531 99 021
Long-term debt, including premiums, less
current sinking fund requirements 83 917 83 618
183 448 182 639
CAPITAL LEASE OBLIGATIONS 11 227 11 878
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 20 850 26 550
Advances from affiliates - 7 250
20 850 33 800
Other Current Liabilities -
Current sinking fund requirements 350 350
Accounts payable -
Affiliated companies 1 028 1 347
Other 21 335 18 123
Accrued taxes -
Local property and other 844 795
Income 2 054 -
Capital lease obligations 574 576
Accrued interest and other 6 174 3 986
32 359 25 177
53 209 58 977
DEFERRED CREDITS
Accumulated deferred income taxes 69 447 71 550
Unamortized investment tax credits 10 967 11 493
Other 7 899 6 986
88 313 90 029
COMMITMENTS AND CONTINGENCIES
$336 197 $343 523
The accompanying notes are an integral part of these financial statements.
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CANAL ELECTRIC COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
(Dollars in thousands)
ELECTRIC OPERATING REVENUES
Sales to affiliated companies $124 903 $107 842 $ 93 478
Sales to non-affiliated companies 89 220 77 708 52 507
214 123 185 550 145 985
OPERATING EXPENSES
Fuel used in production 115 313 79 121 48 707
Electricity purchased for resale 5 601 8 476 14 999
Other operation 27 707 29 992 26 576
Maintenance 10 209 11 768 12 456
Depreciation 19 214 18 682 16 473
Taxes -
Income 9 178 9 720 609
Local property 2 770 2 603 2 777
Payroll and other 768 726 733
190 760 161 088 123 330
OPERATING INCOME 23 363 24 462 22 655
OTHER INCOME 468 2 393 1 230
INCOME BEFORE INTEREST CHARGES 23 831 26 855 23 885
INTEREST CHARGES
Long-term debt 7 910 8 017 8 229
Other interest charges 1 231 2 337 1 878
Allowance for borrowed funds used
during construction (138) (73) (354)
9 003 10 281 9 753
NET INCOME $ 14 828 $ 16 574 $ 14 132
The accompanying notes are an integral part of these financial statements.
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CANAL ELECTRIC COMPANY
STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
(Dollars in thousands)
Balance at beginning of year $52 620 $52 070 $51 647
Add (Deduct)
Net income 14 828 16 574 14 132
Cash dividends on common stock (14 318) (16 024) (13 709)
Balance at end of year $53 130 $52 620 $52 070
The accompanying notes are an integral part of these financial statements.
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CANAL ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 14 828 $ 16 574 $ 14 132
Effects of noncash items -
Depreciation and amortization 22 156 23 485 21 929
Deferred income taxes (973) (963) (3 239)
Investment tax credits (526) (527) (638)
Earnings from corporate joint venture (233) (498) (539)
Dividends from corporate joint venture 479 549 969
Change in working capital, exclusive
of cash and interim financing -
Accounts receivable (4 872) (3 882) (1 767)
Unbilled revenues 589 (237) (438)
Income taxes 2 118 (3 223) 3 220
Local property and other taxes 4 19 (64)
Accounts payable and other 5 473 (1 595) 3 972
All other operating items, net (3 890) 565 (1 380)
Net cash provided by operating activities 35 153 30 267 36 157
INVESTING ACTIVITIES
Additions to property, plant and
equipment (exclusive of AFUDC) (7 391) (14 557) (30 167)
Allowance for borrowed funds used
during construction (138) (73) (354)
Net cash used for investing activities (7 529) (14 630) (30 521)
FINANCING ACTIVITIES
Proceeds from (payment of)
short-term borrowings (5 700) 3 125 12 100
Proceeds from (payment of)
affiliate borrowings (7 250) 1 385 (3 485)
Payment of dividends (14 318) (16 024) (13 709)
Long-term debt issue refunded - (3 420) -
Retirement of long-term debt through
sinking funds (350) (703) (542)
Net cash used for financing activities (27 618) (15 637) (5 636)
Net increase (decrease) in cash 6 - -
Cash at beginning of period 12 12 12
Cash at end of period $ 18 $ 12 $ 12
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid (net of capitalized
amounts) $ 8 700 $ 9 959 $9 436
Income taxes paid $ 8 996 $14 128 $2 269
The accompanying notes are an integral part of these financial statements.
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CANAL ELECTRIC COMPANY
NOTES TO 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 referred to as
"the system." The System is an exempt 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 companies and
several non-regulated companies.
The Company is a wholesale electric generating company organized in 1902
under the laws of the Commonwealth of Massachusetts. The Company's
generating station which is located in Sandwich, Massachusetts consists of
two units: Canal Unit 1 wholly-owned by the Company; and Canal Unit 2
jointly-owned by the Company and Montaup Electric Company (Montaup) (an
unaffiliated company). The Company's largest customers with respect to
output from Unit 1 and Unit 2 are affiliates Cambridge and Commonwealth
Electric. The Company also has a 3.52% interest in the Seabrook 1 nuclear
power plant to provide a portion of the capacity and energy needs of
Cambridge and Commonwealth Electric and acts as agent in the procurement of
additional capacity for the aforementioned affiliates.
The Company has 106 regular employees including 79 (75%) who are repre-
sented by the Utility Workers' Union of America, A.F.L.-C.I.O. During the
first quarter of 1997, a new bargaining agreement was reached that will
remain in effect through May 31, 2001. Employee relations have generally
been satisfactory.
During the second quarter of 1997, the Company initiated a voluntary
personnel reduction program. As a result of this program, the total number
of regular employees has declined by approximately 11% in 1997.
(2) Significant Accounting Policies
(a) Accounting Principles
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior year amounts are reclassified from time to time to conform
with the presentation used in the current year's financial statements.
(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 Telecommunications and Energy
(DTE), formerly the Massachusetts Department of Public Utilities.
Based on the current regulatory framework, the Company accounts for the
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CANAL ELECTRIC COMPANY
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 operations 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.
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.
The principal regulatory assets included in deferred charges at December
31, 1997 and 1996 were as follows:
1997 1996
(Dollars in thousands)
Seabrook related costs $ 4 324 $ 6 262
Deferred income taxes 13 089 13 597
Total regulatory assets $17 413 $19 859
As of December 31, 1997, all of the Company's regulatory assets are
reflected in rates charged to customers over a weighted average period of
approximately 12 years.
In November 1997, the Commonwealth of Massachusetts enacted a
comprehensive electric utility industry restructuring bill. On November 19,
1997, the Company, along with Cambridge Electric and Commonwealth Electric
filed a restructuring plan with the DTE. The plan, approved by the DTE on
February 27, 1998, describes the process by which Commonwealth Electric and
Cambridge Electric 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 industry
restructuring refer to "Management's Discussion and Analysis of Results of
Operations" in Item 7 of this report.
(c) Transactions with Affiliates
Transactions between the Company and other system companies include
purchases and sales of electricity, including the Company's acquisition and
resale of capacity entitlements and related energy generated by certain
units of other New England utilities. The Company functions as the
principal supplier of electric generation capacity for and on behalf of
affiliates Cambridge Electric and Commonwealth Electric, including
abandonment and nonconstruction costs related to the Seabrook project. In
addition, payments for management, accounting, data processing and other
services are made to affiliate COM/Energy Services Company. Transactions
with other system companies are subject to review by the FERC and the DTE.
The Company's operating revenues included the following intercompany
amounts for the periods indicated:
Period Ended Electricity Sales Seabrook Units
December 31, (Canal Units) Purchased Power and Other
(Dollars in thousands)
1997 $76 859 $ 8 885 $39 159
1996 52 035 11 882 43 925
1995 39 617 18 694 35 167
(d) Other Major Customers
The Company is a wholesale electric generating company that sells
power under life-of-the-unit contracts, approved by FERC to Boston Edison
Company, Montaup Electric Company and New England Power Company,
(unaffiliated utilities). Each utility is obligated to purchase one-quarter
of the capacity and energy of Canal Unit 1.
(e) Equity Method of Accounting
The Company uses the equity method of accounting for its 3.8%
investment in the New England/Hydro-Quebec Phase II transmission facilities
due in part to its ability to exercise significant influence over operating
and financial policies of the entity. Under this method, it records as
income the proportionate share of the net earnings of this project with a
corresponding increase in the carrying value of the investment. The
investment amount is reduced as cash dividends are received. For further
information on this investment, refer to Schedule I in Part IV of this
report.
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CANAL ELECTRIC COMPANY
(f) Depreciation and Nuclear Fuel Amortization
Depreciation is provided using the straight-line method at rates intended
to amortize the original cost and the estimated cost of removal less salvage
of properties over their estimated economic lives. The Company's composite
depreciation rate, based on average depreciable property in service, was
4.45% in 1997, 4.42% in 1996 and 4.09% in 1995.
The cost of nuclear fuel is amortized to fuel expense based on the
quantity of energy produced. Nuclear fuel expense also includes a provision
for the costs associated with the ultimate disposal of the spent nuclear
fuel.
(g) Maintenance
Expenditures for repairs of property and replacement and renewal of items
determined to be less than units of property are charged to maintenance
expense. Additions, replacements and renewals of property considered to be
units of property, are charged to the appropriate plant accounts. Upon
retirement, accumulated depreciation is charged with the original cost of
property units and the cost of removal net of salvage.
(h) Allowance for Funds Used During Construction
Under applicable rate-making practices, the Company is permitted to
include an allowance for funds used during construction (AFUDC) as an
element of its depreciable property costs. This allowance is based on the
amount of construction work in progress that is not included in the rate
base on which the Company earns a return. An amount equal to the AFUDC
capitalized in the current period is reflected in the accompanying
Statements of Income.
While AFUDC does not provide funds currently, these amounts are
recoverable in revenues over the service life of the constructed property.
The Company develops rates based upon its current cost of capital and used a
compound rate of 6% in 1997, 6.25% in 1996 and 6.75% in 1995.
(3) Income Taxes
For financial reporting purposes, the Company provides federal and state
income taxes on a separate return basis. However, for federal income tax
purposes, the Company's taxable income and deductions are included in the
consolidated income tax return of the System and it makes tax payments or
receives refunds on the basis of its tax attributes in the tax return in
accordance with applicable regulations.
The following is a summary of the provisions for income taxes for the
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CANAL ELECTRIC COMPANY
years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
(Dollars in thousands)
Federal:
Current $ 9 128 $ 9 511 $ 3 637
Deferred (764) (577) 1 585
Investment tax credits (526) (527) (638)
7 838 8 407 4 584
State:
Current 1 558 1 747 955
Deferred (133) (223) (11)
1 425 1 524 944
9 263 9 931 5 528
Amortization of regulatory liability
relating to deferred income taxes (76) (163) (4 813)
Total $ 9 187 $ 9 768 $ 715
Federal and state income taxes
charged to:
Operating expense $ 9 178 $ 9 720 $ 609
Other income 9 48 106
$ 9 187 $ 9 768 $ 715
Deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the year in which the
differences are expected to reverse.
In May 1995, the Company refunded certain unprotected excess deferred
taxes to Commonwealth Electric and Cambridge Electric resulting in a
reduction to the 1995 tax provision.
Accumulated deferred income taxes consisted of the following in 1997 and
1996:
1997 1996
(Dollars in thousands)
Liabilities
Property-related $78 706 $78 542
Seabrook nonconstruction 707 1 183
All other 1 645 3 535
81 058 83 260
Assets
Investment tax credit 7 078 7 418
Regulatory liability 2 180 2 230
All other 1 490 1 569
10 748 11 217
Accumulated deferred income taxes, net $70 310 $72 043
The net year-end deferred income tax liability above includes a current
deferred tax liability of $863,000 and $493,000 in 1997 and 1996,
respectively, which are included in accrued income taxes in the accompanying
Balance Sheets.
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CANAL ELECTRIC COMPANY
The total income tax provision set forth on the previous page represents
38% in 1997, 37% in 1996 and 5% in 1995, of income before such taxes. The
following table reconciles the statutory federal income tax rate to these
percentages:
1997 1996 1995
Federal statutory rate 35% 35% 35%
Federal income tax expense at statutory levels $8 405 $9 220 $5 196
Increase (Decrease) from statutory rate:
Tax versus book depreciation 1 515 1 479 1 227
State tax, net of federal tax benefit 927 991 613
Amortization of investment tax credits (526) (527) (638)
Excess deferred reserves (76) (163) (4 813)
Reversals of capitalized expenses (560) (559) (556)
Other (498) (673) (314)
$9 187 $9 768 $ 715
Effective federal tax rate 38% 37% 5%
(4) Long-Term Debt and Interim Financing
(a) Long-Term Debt
Long-term debt outstanding, exclusive of current sinking fund
requirements and related premiums, collateralized by substantially all of
the Company's property, is as follows:
Original Balance December 31,
Issue 1997 1996
(Dollars in thousands)
First Mortgage Bonds -
Series B, 8.85%, due 2006 $35 000 $33 950 $34 300
Series E, 7 3/8%, due 2020 10 000 10 000 10 000
Series F, 9 7/8%, due 2020 40 000 40 000 40 000
$83 950 $84 300
The Series B First and General Mortgage Bonds require an annual sinking
fund payment of $350,000. The requirement may be met by payment, repurchase
of bonds or certification of an amount of property additions equal to 60% of
bondable property (as that term is defined in the indenture).
The Series E and Series F First and General Mortgage Bonds were issued
in conjunction with The Industrial Development Authority of the State of New
Hampshire issuing Solid Waste Disposal Bonds and Pollution Control Bonds,
respectively. The bonds were issued pursuant to a Loan and Trust Agreement
dated December 1, 1990 among the Authority, the Company and the First
National Bank of Boston, the Trustee.
(b) Notes Payable to Banks
The Company and other system companies maintain both committed and
uncommitted lines of credit for the short-term financing of their
construction programs and other corporate purposes. As of December 31,
1997, system companies had $145 million of committed lines of credit that
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CANAL ELECTRIC COMPANY
will expire at varying intervals in 1998. These lines are normally renewed
upon expiration and require annual fees of up to .1875% of the individual
line. At December 31, 1997, the system's uncommitted lines of credit
totaled $10 million. Interest rates on the Company's outstanding borrowings
generally are at an adjusted money market rate and averaged 5.8% in 1997 and
5.6% in 1996. The Company's notes payable to banks totaled $20,850,000 and
$26,550,000 at December 31, 1997 and 1996, respectively.
(c) Advances from Affiliates
The Company had no short-term notes payable to the System at December
31, 1997 compared to $5,620,000 at December 31, 1996. These notes are
written for a term of up to 11 months and 29 days. Interest is at the prime
rate and is adjusted for changes in that rate during the terms of the notes.
This rate averaged 8.5% in 1997 and 8.3% in 1996.
The Company is a member of the COM/Energy Money Pool (the Pool), an
arrangement among the subsidiaries of the System, whereby short-term cash
surpluses are used to help meet the short-term borrowing needs of the
utility subsidiaries. In general, lenders to the Pool receive a higher rate
of return than they otherwise would on such investments, while borrowers pay
a lower interest rate than that available from banks. Interest rates on the
outstanding borrowings are based on the monthly average rate the Company
would otherwise have to pay banks, less one-half the difference between that
rate and the monthly average U.S. Treasury Bill weekly auction rate. The
borrowings are for a period of less than one year and are payable upon
demand. The Company had no borrowings from the Pool at December 31, 1997
compared to $1,630,000 at December 31, 1996. Rates on these borrowings
averaged 5.4% in 1997 and 5.3% in 1996.
(d) Disclosures About Fair Value of Financial Instruments
The fair value of certain financial instruments included in the
accompanying Balance Sheets as of December 31, 1997 and 1996 are as follows:
1997 1996
(Dollars in thousands)
Carrying Fair Carrying Fair
Value Value Value Value
Long-term Debt $84 267 $102 121 $83 968 $97 446
The carrying amount of cash, notes payable to banks and advances from
affiliates approximates the fair value because of the short maturity of
these financial instruments.
The estimated fair value of long-term debt is based on quoted market
prices of the same or similar issues or on the current rates offered for
debt with the same remaining maturity. The fair values shown above do not
purport to represent the amounts at which those obligations would be
settled.
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CANAL ELECTRIC COMPANY
(5) Commitments and Contingencies
(a) 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. These estimates include
expenditures related to the Company's 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 expenditures on
an interim basis with internally generated funds and short-term borrowings
that are ultimately expected to be repaid with proceeds from sales of long-
term debt and equity securities.
(b) Seabrook Nuclear Power Plant
The system's 3.52% interest in the Seabrook nuclear power plant is owned
by the Company to provide for a portion of the capacity and energy needs of
Cambridge and Commonwealth Electric. The Company is recovering 100% of its
Seabrook 1 investment through power contracts pursuant to FERC approval.
Pertinent information with respect to the Company's joint-ownership
interest in Seabrook 1 and information relating to operating expenses which
are included in the accompanying financial statements, are as follows:
1997 1996
(Dollars in thousands)
Utility plant-in-service $232 471 $232 183
Nuclear fuel 22 207 21 613
Accumulated depreciation
and amortization (64 379) (57 359)
Construction work in progress 1 036 844
$191 335 $197 281
1997 1996 1995
(Dollars in thousands)
Operating expenses:
Fuel $ 1 471 $ 1 727 $ 2 353
Other operation 4 206 4 091 4 292
Maintenance 2 364 990 1 376
Depreciation 6 314 6 544 6 542
Amortization 1 319 1 319 1 319
$15 674 $14 671 $15 882
Plant capacity (MW) 1,150 In-service date 1990
Canal's share: Operating license
Percent interest 3.52% expiration date 2026
Entitlement (MW) 40.5
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CANAL ELECTRIC COMPANY
The Company and the other joint-owners have established a decommis-
sioning fund to cover decommissioning costs. The estimated cost to decom-
mission the plant is $469.1 million in current dollars. The Company's share
of this liability (approximately $16.5 million), less its share of the
market value of the assets held in a decommissioning trust (approximately
$2.5 million), is approximately $14 million at December 31, 1997.
(c) 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 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.
(6) Dividend Restriction
At December 31, 1997, approximately $37,860,000 of retained earnings was
restricted against the payment of cash dividends by terms of the Indenture
of Trust securing long-term debt.
(7) Employee Benefit Plans
(a) Pension
The Company has a noncontributory pension plan covering substantially
all regular employees who have attained the age of 21 and have completed one
year of service. Pension benefits are based on an employee's years of
service and compensation. The Company makes monthly contributions to the
plan consistent with the funding requirements of the Employee Retirement
Income Security Act of 1974.
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CANAL ELECTRIC COMPANY
Components of pension expense and related assumptions to develop pension
expense were as follows:
1997 1996 1995
(Dollars in thousands)
Service cost $ 524 $ 527 $ 435
Interest cost 1 314 1 254 1 151
Return on plan assets - (gain)/loss (3 145) (2 321) (3 113)
Net amortization and deferral 1 844 1 157 2 045
Total pension expense 537 617 518
Transfers from affiliates, net 372 347 324
Less: Amounts capitalized and other 206 224 193
Net pension expense $ 703 $ 740 $ 649
Discount rate 7.50% 7.25% 8.50%
Assumed rate of return 8.75 8.75 9.00
Rate of increase in future
compensation 4.25 4.25 5.00
Pension expense reflects the use of the projected unit credit method
which is also the actuarial cost method used in determining future funding
of the plan. The funded status of the plan (using a measurement date of
December 31) is as follows:
1997 1996
(Dollars in thousands)
Accumulated benefit obligation:
Vested $(17 279) $(12 241)
Nonvested (2 613) (2 180)
$(19 892) $(14 421)
Projected benefit obligation $(22 119) $(17 576)
Plan assets at fair market value 20 287 17 523
Projected benefit obligation greater
than plan assets (1 832) (53)
Unamortized transition obligation 66 84
Unrecognized prior service cost 426 480
Unrecognized gain 951 (985)
Accrued pension liability $ (389) $ (474)
The following actuarial assumptions were used in determining the
plan's year-end funded status:
1997 1996
Discount rate 7.00% 7.50%
Rate of increase in future compensation 3.75 4.25
Plan assets consist primarily of fixed-income and equity securities.
Fluctuations in the fair market value of plan assets will affect pension
expense in future years.
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<PAGE 31>
CANAL ELECTRIC COMPANY
(b) Other Postretirement Benefits
Certain employees are eligible for postretirement benefits if they meet
specific requirements. These benefits could include health and life
insurance coverage and reimbursement of Medicare Part B premiums. Under
certain circumstances, eligible employees are required to make contributions
for postretirement benefits.
To fund its postretirement benefits, the Company makes contributions to
various voluntary employees' beneficiary association (VEBA) trusts that were
established pursuant to section 501(c)(9) of the Internal Revenue Code (the
Code). The Company also makes contributions to a subaccount of its pension
plan pursuant to section 401(h) of the Code to fund a portion of its
postretirement benefit obligation. The Company contributed approximately
$646,000, $725,000 and $693,000 to these trusts during 1997, 1996 and 1995,
respectively.
The net periodic postretirement benefit cost for the years ended
December 31, 1997, 1996 and 1995 includes the following components and
related assumptions:
1997 1996 1995
(Dollars in thousands)
Service cost $ 176 $ 187 $ 131
Interest cost 493 490 441
Return on plan assets (549) (324) (383)
Amortization of transition
obligation over 20 years 248 248 248
Net amortization and deferral 286 131 261
Total postretirement benefit cost 654 732 698
Transfers from affiliates, net 452 446 447
Less: Amounts capitalized and other 296 (1 230) 867
Net postretirement benefit cost $ 810 $2 408 $ 278
Discount rate 7.50% 7.25% 8.50%
Assumed rate of return 8.75 8.75 9.00
Rate of increase in future compensation 4.25 4.25 5.00
The funded status of the Company's plan using a measurement date of
December 31, 1997 and 1996 is as follows:
1997 1996
(Dollars in thousands)
Accumulated postretirement benefit obligation:
Retirees $(4 749) $(3 108)
Fully eligible active plan participants (819) (858)
Other active plan participants (2 066) (2 620)
(7 634) (6 586)
Plan assets at fair market value 3 790 2 825
Accumulated postretirement benefit obligation
greater than plan assets (3 844) (3 761)
Unamortized transition obligation 3 730 3 978
Unrecognized gain (114) (217)
$ - $ -
<PAGE>
<PAGE 32>
CANAL ELECTRIC COMPANY
The following actuarial assumptions were used in determining the plan's
estimated accumulated postretirement benefit obligation (APBO) and the
funded status for 1997 and 1996:
1997 1996
Discount rate 7.00% 7.50%
Rate of increase in future compensation 3.75 4.25
Medicare part B premiums 3.10 9.50
Medical care 6.75 7.00
Dental care 4.50 5.00
The above dental rate remains constant through the year 2007. Rates for
Medicare Part B premiums and medical care decrease to 3.1% and 4.5%,
respectively, by 2007 and remain at that level thereafter. A one percent
change in the medical trend rate would have a $103,000 impact on the
Company's annual expense and would change the APBO by approximately
$977,000.
Plan assets consist primarily of fixed-income and equity securities.
Fluctuations in the fair market value of plan assets will affect
postretirement benefit expense in future years.
(c) Savings Plan
The Company has an Employees Savings Plan that provides for Company
contributions equal to contributions by eligible employees up to four
percent of each employee's compensation rate and up to five percent for
those employees no longer eligible for postretirement health benefits. The
Company's contribution was $256,000 in 1997, $261,000 in 1996 and $258,000
in 1995.
(8) Lease Obligations
The Company leases equipment and office space under arrangements that
are classified as operating leases. These lease agreements are for terms of
one year or longer. Leases currently in effect contain no provisions that
prohibit the Company from entering into future lease agreements or
obligations.
The Company has entered into support agreements with other participating
New England utilities for 3.8% of the Hydro-Quebec Phase II transmission
facilities and makes monthly support payments to cover depreciation and
interest costs.
<PAGE>
<PAGE 33>
CANAL ELECTRIC COMPANY
Future minimum lease payments, by period and in the aggregate, of
capital leases and noncancelable operating leases consisted of the following
at December 31, 1997:
Operating Leases Capital Leases
(Dollars in thousands)
1998 $ 541 $ 1 851
1999 530 1 784
2000 476 1 722
2001 422 1 660
2002 422 1 598
Beyond 2002 1 259 17 129
Total future minimum lease payments $3 650 25 744
Less:Estimated interest element
included therein 13 943
Estimated present value of future
minimum lease payments $11 801
Total rent expense for all operating leases, except those with terms
of a month or less, amounted to $575,000 in 1997, $475,000 in 1996 and
$431,000 in 1995. There were no contingent rentals and no sublease rentals
for the years 1997, 1996 and 1995.
<PAGE>
<PAGE 34>
CANAL ELECTRIC COMPANY
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Index to Financial Statements
Financial statements and notes thereto of the Company together with the
Report of Independent Public Accountants, are filed under Item 8 of this
report and listed on the Index to Financial Statements and Schedules
(page 15).
(a) 2. Index to Financial Statement Schedules
Filed herewith at page indicated are financial statement schedules of
the Company:
Schedule I - Investments in, Equity Earnings of, and Dividends Received
from Related Parties - Years Ended December 31, 1997, 1996 and 1995
(page 41).
(a) 3. Exhibits:
Notes to Exhibits -
a. Unless otherwise designated, the exhibits listed below are
incorporated by reference to the appropriate exhibit numbers and the
Securities and Exchange Commission file numbers indicated in
parentheses.
b. The following is a glossary of Commonwealth Energy System and
subsidiary companies' acronyms that are used throughout the following
Exhibit Index:
CES.................... Commonwealth Energy System
CE..................... Commonwealth Electric Company
CEL.................... Cambridge Electric Light Company
CEC.................... Canal Electric Company
NBGEL.................. New Bedford Gas and Edison Light Company
Exhibit Index
Exhibit 3. Articles of incorporation and by-laws.
3.1. Articles of incorporation of CEC (Exhibit 1 to CEC's 1990 Form
10-K, File No. 2-30057).
3.2. By-laws of CEC, as amended (Exhibit 2 to the CEC 1990 Form 10-K,
File No. 2-30057).
<PAGE>
<PAGE 35>
CANAL ELECTRIC COMPANY
Exhibit 4. Instruments defining the rights of security holders, including
indentures
4.2.1 Indenture of Trust and First Mortgage between CEC and State Street
Bank and Trust Company, Trustee, dated October 1, 1968 (Exhibit
4(b) to the CEC Form S-1, File No. 2-30057).
4.2.2 First and General Mortgage Indenture between CEC and Citibank,
N.A., Trustee, dated September 1, 1976 (Exhibit 4(b)(2) to the CEC
Form S-1, File No. 2-56915).
4.2.3 First Supplemental dated October 1, 1968 with State Street Bank
and Trust Company, Trustee, dated September 1, 1976 (Exhibit
4(b)(3) to the CEC Form S-1, File No. 2-56915).
4.2.4 Third Supplemental dated September 1, 1976 with Citibank, N.A.,
New York, NY, Trustee, dated December 1, 1990 (Exhibit 3 to the
CEC 1990 Form 10-K, File No. 2-30057).
4.2.5 Fourth Supplemental dated September 1, 1976 with Citibank, N.A.,
New York, NY, Trustee, dated December 1, 1990 (Exhibit 4 to the
CEC 1990 Form 10-K, File No. 2-30057).
Exhibit 10. Material Contracts
10.1 Power contracts.
10.1.1 Power contracts between CEC and NBGEL and CEL dated December 1,
1965 (Exhibit 13(a)(1-4) to the CEC Form S-1, File No. 2-30057).
10.1.2.1 Agreement between CEC and Montaup Electric Company (MEC) for use of
common facilities by Canal Units I and II and for allocation of
related costs, executed October 14, 1975 (Exhibit 1 to the CEC 1985
Form 10-K, File No. 2-30057).
10.1.2.2 Agreement between CEC and MEC for joint-ownership of Canal Unit II,
executed October 14, 1975 (Exhibit 2 to the CEC 1985 Form 10-K,
File No. 2-30057).
10.1.2.3 Agreement between CEC and MEC for lease relating to Canal Unit II,
executed October 14, 1975 (Exhibit 3 to the CEC 1985 Form 10-K,
File No. 2-30057).
10.1.3 Contract between CEC, NBGEL and CEL, affiliated companies, for the
sale of specified amounts of electricity from Canal Unit 2 dated
January 12, 1976 (Exhibit 7 to the CES Form 10-K for 1985, File No.
1-7316).
10.1.4 Power contract, as amended to February 28, 1990, superseding the
Power Contract dated September 1, 1986 and amendment dated June 1,
1988, between CEC (seller) and CE and CEL (purchasers) for seller's
entire share of the Net Unit Capability of Seabrook 1 and related
energy (Exhibit 1 to the CEC Form 10-Q (March 1990), File No. 2-
30057).
<PAGE>
<PAGE 36>
CANAL ELECTRIC COMPANY
10.1.5 Purchase and Sale Agreement together with an implementing Addendum
dated December 31, 1981 between CEC and CE for the purchase and
sale of the CE 3.52% joint-ownership interest in the Seabrook
units, dated January 2, 1981 (Exhibit 1 to the Company's Form 8-K
(January 13, 1982), File No. 2-30057).
10.1.6 Agreement for Joint-Ownership, Construction and Operation of the
New Hampshire Nuclear Units (Seabrook) dated May 1, 1973 and filed
by NBGEL as Exhibit 13(N) on Form S-1 dated October 1973, File No.
2-49013, and as amended below:
10.1.6.1 First through Fifth Amendments to 10.1.6 dated May 24, 1974,
June 21, 1974, September 25, 1974, October 25, 1974, and January
31, 1975, respectively (Exhibit 13(m) to the NBGEL Form S-1
(November 7, 1975), File No. 2-54995).
10.1.6.2 Sixth through Eleventh Amendments to 10.1.6 dated April 18, 1979,
April 18, 1979, April 25, 1979, June 8, 1979, October 11, 1979 and
December 15, 1979, respectively (Exhibit 1 to the CEC 1989 Form 10-
K, File No. 2-30057).
10.1.6.3 Twelfth and Thirteenth Amendments to 10.1.6 dated May 16, 1980 and
December 31, 1980, respectively ((Exhibit 1 and 2 to the CE Form
10-Q (June 1982), File No. 2-7749).
10.1.6.4 Fourteenth Amendment to 10.1.6 dated June 1, 1982 (Exhibit 3 to the
CE Form 10-Q (June 1982), File No. 2-7749).
10.1.6.5 Fifteenth and Sixteenth Amendments to 10.1.6 dated April 27, 1984
and June 15, 1984, respectively (Exhibit 1 to the CEC Form 10-Q
(June 1984), File No. 2-30057).
10.1.6.6 Seventeenth Amendment to 10.1.6 dated March 8, 1985 (Exhibit 1 to
the CEC Form 10-Q (March 1985), File No. 2-30057).
10.1.6.7 Eighteenth Amendment to 10.1.6 dated March 14, 1986 (Exhibit 1 to
the CEC Form 10-Q (March 1986), File No. 2-30057).
10.1.6.8 Nineteenth Amendment to 10.1.6 dated May 1, 1986 (Exhibit 1 to the
CEC Form 10-Q (June 1986), File No. 2-30057).
10.1.6.9 Twentieth Amendment to 10.1.6 dated September 19, 1986 (Exhibit 1
to the CEC Form 10-K for 1986, File No. 2-30057).
10.1.6.10 Twenty-First Amendment to 10.1.6 dated November 12, 1987 (Exhibit 1
to the CEC Form 10-K for 1987, File No. 2-30057).
10.1.6.11 Twenty-Second Amendment and Settlement Agreement to 10.1.6 dated
January 13, 1989 (Exhibit 4 to the CEC 1988 Form 10-K, File No. 2-
30057).
10.1.7 Capacity Acquisition Agreement between CEC, CEL and CE dated
September 25, 1980 (Exhibit 1 to the CEC 1991 Form 10-K, File No.
2-30057).
<PAGE>
<PAGE 37>
CANAL ELECTRIC COMPANY
10.1.7.1 Supplement to 10.1.7 consisting of three Capacity Acquisition
Commitments each dated May 7, 1987, concerning Phases I and II of
the Hydro-Quebec Project and electricity acquired from Connecticut
Light and Power Company (CL&P) (Exhibit 1 to the CEC Form 10-Q
(September 1987), File No. 2-30057).
10.1.7.2 Amendment to 10.1.7 as amended, and restated, June 1, 1993,
henceforth referred to as the Capacity Acquisition and Disposition
Agreement, whereby CEC, as agent, in addition to acquiring power
may also sell bulk electric power which CEL and/or CE owns or
otherwise has the right to sell (Exhibit 1 to the CEC Form 10-Q
(September 1993), File No. 2-30057).
10.1.8 Agreement, dated September 1, 1985, With Respect To Amendment of
Agreement With Respect To Use Of Quebec Interconnection, dated
December 1, 1981, among certain NEPOOL utilities to include Phase
II facilities in the definition of "Project" (Exhibit 1 to the CEC
Form 10-Q (September 1985), File No. 2-30057).
10.1.8.1 Amendatory Agreement No.3 with Respect to Use of Quebec
Interconnection dated December 1, 1981, as amended to June 1, 1990,
among certain NEPOOL utilities (Exhibit 1 to the CEC Form 10-Q
(September 1990), File No. 2-30057).
10.1.9 Preliminary Quebec Interconnection Support Agreement - Phase II
among certain New England electric utilities dated June 1, 1984
(Exhibit 6 to the CE Form 10-Q (June 1984), File No. 2-7749).
10.1.9.1 First through Third Amendments to 10.1.9 as amended March 1, 1985,
January 1, 1986 and March 1, 1987, respectively (Exhibit 1 to the
CEC Form 10-Q (March 1987), File No. 2-30057).
10.1.9.2 Fifth through Seventh Amendments to 10.1.9 as amended October 15,
1987, December 15, 1987 and March 1, 1988, respectively (Exhibit 1
to the CEC Form 10-Q (June 1988), File No. 2-30057).
10.1.9.3 Fourth and Eighth Amendments to 10.1.9 as amended July 1, 1987 and
August 1, 1988, respectively (Exhibit 3 to the CEC Form 10-Q
(September 1988), File No. 2-30057).
10.1.9.4 Ninth and Tenth Amendments to 10.1.9 as amended November 1, 1988
and January 15, 1989, respectively (Exhibit 2 to the CEC 1988 Form
10-K, File No. 2-30057).
10.1.9.5 Eleventh Amendment to 10.1.9 as amended November 1, 1989 (Exhibit 4
to the CEC 1989 Form 10-K, File No. 2-30057).
10.1.9.6 Twelfth Amendment to 10.1.9 as amended April 1, 1990 (Exhibit 1 to
the CEC Form 10-Q (June 1990) File No. 2-30057).
10.1.10 Agreement to Preliminary Quebec Interconnection Support Agreement -
Phase II among Public Service Company of New Hampshire (PSNH), New
England Power Co. (NEP), Boston Edison Co. (BECO), and CEC whereby
PSNH assigns a portion of its interests under the original
Agreement to the other three parties, dated October 1, 1987
(Exhibit 2 to the CEC 1987 Form 10-K, File No. 2-30057).
<PAGE>
<PAGE 38>
CANAL ELECTRIC COMPANY
10.1.11 Phase II Equity Funding Agreement for New England Hydro
Transmission Electric Company, Inc. (New England Hydro)
(Massachusetts), dated June 1, 1985, between New England Hydro and
certain NEPOOL utilities (Exhibit 2 to the CEC Form 10-Q (September
1985), File No. 2-30057).
10.1.12 Phase II Equity Funding Agreement for New England Hydro
Transmission Corporation (New Hampshire Hydro), dated June 1, 1985,
between New Hampshire Hydro and certain NEPOOL utilities (Exhibit 3
to the CEC Form 10-Q (September 1985), File No. 2-30057).
10.1.12.1 Amendment No. 1 to 10.1.12 as amended May 1, 1986 (Exhibit 6 to the
CEC Form 10-Q (March 1987), File No. 2-30057).
10.1.12.2 Amendment No. 2 to 10.1.12 as amended September 1, 1987 (Exhibit 3
to the CEC Form 10-Q (September 1987), File No. 2-30057).
10.1.13 Phase II Massachusetts Transmission Facilities Support Agreement,
dated June 1, 1985, refiled as a single agreement incorporating
Amendments 1 through 7 dated May 1, 1986 through January 1, 1989,
respectively, between New England Hydro and certain NEPOOL
utilities (Exhibit 2 to the CEC Form 10-Q (September 1990), File
No. 2-30057).
10.1.14 Phase II New Hampshire Transmission Facilities Support Agreement,
dated June 1, 1985, refiled as a single agreement incorporating
Amendments 1 through 8 dated May 1, 1986 through January 1, 1989,
respectively, between New Hampshire Hydro and certain NEPOOL
utilities (Exhibit 3 to the CEC Form 10-Q (September 1990), File
No. 2-30057).
10.1.15 Phase II New England Power AC Facilities Support Agreement dated
June 1, 1985, between New England Power and certain NEPOOL
utilities (Exhibit 6 to the CEC Form 10-Q (September 1985), File
No. 2-30057).
10.1.15.1 Amendments Nos. 1 and 2 to 10.1.15 as amended May 1, 1986 and
February 1, 1987, respectively (Exhibit 5 to the CEC Form 10-Q
(March 1987), File No. 2-30057).
10.1.15.2 Amendments Nos. 3 and 4 to 10.1.15 as amended June 1, 1987 and
September 1, 1987, respectively (Exhibit 5 to the CEC Form 10-Q
(September 1987), File No. 2-30057).
10.1.16 Agreement Authorizing Execution of Phase II Firm Energy Contract,
dated September 1, 1985, among certain NEPOOL utilities in regard
to the purchase of power from Hydro Quebec (Exhibit 8 to the CEC
Form 10-Q (September 1985), File No. 2-30057).
10.2 Other agreements.
10.2.1 Employees Savings Plan of Commonwealth Energy System and Subsidiary
Companies as amended and restated as of January 1, 1993 (Exhibit 2
to the CES Form 10-Q (September 1993), File No. 1-7316).
<PAGE>
<PAGE 39>
CANAL ELECTRIC COMPANY
10.2.1.1 First Amendment to the Employees Savings Plan of Commonwealth
Energy System and Subsidiary Companies, as amended and restated as
of January 1, 1993, effective October 1, 1994 (Exhibit 1 to CES
Form S-8 (January 1995), File No. 1-7316).
10.2.1.2 Second Amendment to the Employees Savings Plan of Commonwealth
Energy System and Subsidiary Companies, as amended and restated as
of January 1, 1993, effective April 1, 1996 (Exhibit 1 to CES Form
10-K/A Amendment No. 1 (April 30, 1996), File No. 1-7316).
10.2.1.3 Third Amendment to the Employees Savings Plan of Commonwealth
Energy System and Subsidiary Companies, as amended and restated as
of January 1, 1993, effective January 1, 1997 (Exhibit 1 to CES
Form 10-K/A Amendment No. 1 (April 29, 1997), File No. 1-7316).
10.2.2 Pension Plan for Employees of Commonwealth Energy System and
Subsidiary Companies as amended and restated January 1, 1993
(Exhibit 1 to the CES Form 10-Q (September 1993), File No.1-7316).
10.2.3 New England Power Pool Agreement (NEPOOL) dated September 1, 1971
as amended through August 1, 1977, between NEGEA Service Corp. as
agent for CEL, CEC, NBGEL, and various other electric utilities
operating in New England, together with amendments dated August 15,
1978 and January 31, 1979 and February 1, 1980 (Exhibit 5(c)(13) to
the CES Form S-16 (April 1980), File No. 2-64731).
10.2.3.1 Thirteenth Amendment to 10.2.3 as amended September 1, 1981
(Exhibit 5 to the CES Form 10-K for 1981, File No. 1-7316).
10.2.3.2 Fourteenth through Twentieth Amendments to 10.2.3 as amended
December 1, 1981, June 1, 1982, June 15, 1983, October 1, 1983,
August 1, 1985, August 15, 1985 and September 1, 1985, respectively
(Exhibit 4 to the CES Form 10-Q (September 1985), File No. 1-7316).
10.2.3.3 Twenty-first Amendment to the New England Power Pool Agreement
dated September 1, 1971, as amended January 1, 1986 (Exhibit 1 to
the CES Form 10-Q (March 1986), File No. 1-7316).
10.2.3.4 Twenty-second Amendment to 10.2.3 as amended to September 1, 1986
(Exhibit 1 to the CES Form 10-Q (September 1986), File No. 1-7316).
10.2.3.5 Twenty-third Amendment to 10.2.3 as amended to April 30, 1987
(Exhibit 1 to the CES Form 10-Q (June 1987), File No. 1-7316).
10.2.3.6 Twenty-fourth Amendment to 10.2.3 as amended to March 1, 1988
(Exhibit 1 to the CES Form 10-K for 1987, File No. 1-7316).
10.2.3.7 Twenty-fifth Amendment to 10.2.3 as amended to May 1, 1988 (Exhibit
1 to the CES Form 10-Q (March 1988), File No. 1-7316).
10.2.3.8 Twenty-sixth Amendment to 10.2.3 as amended to March 15, 1989
(Exhibit 1 to the CES Form 10-Q (March 1989), File No. 1-7316).
<PAGE>
<PAGE 40>
CANAL ELECTRIC COMPANY
10.2.3.9 Twenty-seventh Amendment to 10.2.3 as amended to October 1, 1990
(Exhibit 3 to the CES 1990 Form 10-K, File No. 1-7316).
10.2.3.10 Twenty-eighth Amendment to 10.2.3 as amended September 15, 1992
(Exhibit 1 to the CES Form 10-Q (September 1994), File No. 1-7316).
10.2.3.11 Twenty-ninth Amendment to 10.2.3 as amended May 1, 1993 (Exhibit 2
to the CES Form 10-Q (September 1994), File No. 1-7316).
Filed herewith:
Exhibit 27.
Filed herewith as Exhibit 1 is the Financial Data Schedule for the
year ended December 31, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
December 31, 1997.
<PAGE>
<PAGE 41>
<TABLE> SCHEDULE I
CANAL ELECTRIC COMPANY
INVESTMENTS IN, EQUITY EARNINGS OF,
AND DIVIDENDS RECEIVED FROM RELATED PARTIES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Thousands)
<CAPTION>
Investment Investment
Balance Balance
Description of Investment and Beginning of Equity Dividends End of
Name of Issuer Year Shares Earnings Received Year
New England/Hydro-Quebec Phase II
HVDC Transmission Project -
<S> YEAR ENDED DECEMBER 31, 1997
New England Hydro-Transmission <C> <C> <C> <C> <C>
Electric Company, Inc. $ 2 030 126 407 $ 140 $ 301 $1 869
New England Hydro-Transmission
Corporation 1 291 626.910 93 178 1 206
Total $ 3 321 $ 233 $ 479 $3 075
<S> YEAR ENDED DECEMBER 31, 1996
New England Hydro-Transmission <C> <C> <C> <C> <C>
Electric Company, Inc. $ 2 026 136 656 $ 311 $ 307 $2 030
New England Hydro-Transmission
Corporation 1 346 673.031 187 242 1 291
Total $ 3 372 $ 498 $ 549 $3 321
<S> YEAR ENDED DECEMBER 31, 1995
New England Hydro-Transmission <C> <C> <C> <C> <C>
Electric Company, Inc. $ 2 313 136 656 $ 328 $ 615 $2 026
New England Hydro-Transmission
Corporation 1 489 734.526 211 354 1 346
Total $ 3 802 $ 539 $ 969 $3 372
<FN>
In 1997 New England Hydro-Transmission Electric Company, Inc. repurchased 7.5% (10,249.2 shares) of its
outstanding shares at $14.20 per share. The Company received proceeds of $145,539. During 1997, 1996 and
1995, New England Hydro-Transmission Corporation (NEHTC) repurchased 6.85% (46.124 shares), 6.52% (61.495
shares) and 6.52% (51.246 shares), respectively, of its outstanding shares. The Company received proceeds
of $85,207 ($1,847.46 per share), $112,616 ($1,831.30 per share) and $94,017 ($1,834.62 per share) for 1997,
1996 and 1995,respectively. Receipts from the repurchase of shares are included with dividends.
/TABLE
<PAGE>
<PAGE 42>
CANAL ELECTRIC COMPANY
FORM 10-K DECEMBER 31, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: WILLIAM G. POIST
William G. Poist,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Principal Executive Officers:
WILLIAM G. POIST March 31, 1998
William G. Poist,
Chairman of the Board
R. D. WRIGHT March 31, 1998
Russell D. Wright,
Vice Chairman and Chief Executive Officer
DEBORAH A. McLAUGHLIN March 31, 1998
Deborah A. McLaughlin
President and Chief Operating Officer
Principal Financial Officer:
JAMES D. RAPPOLI March 31, 1998
James D. Rappoli
Financial Vice President and Treasurer
A majority of the Board of Directors:
WILLIAM G. POIST March 31, 1998
William G. Poist, Director
R. D. WRIGHT March 31, 1998
Russell D. Wright, Director
DEBORAH A. McLAUGHLIN March 31, 1998
Deborah A. McLaughlin, Director
JAMES D. RAPPOLI March 31, 1998
James D. Rappoli, Director
<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-K of Canal Electric Company for
the fiscal year ended December 31, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000016906
<NAME> CANAL ELECTRIC COMPANY
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> YEAR
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 274,438
<OTHER-PROPERTY-AND-INVEST> 3,075
<TOTAL-CURRENT-ASSETS> 31,497
<TOTAL-DEFERRED-CHARGES> 27,187
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 336,197
<COMMON> 38,080
<CAPITAL-SURPLUS-PAID-IN> 8,321
<RETAINED-EARNINGS> 53,130
<TOTAL-COMMON-STOCKHOLDERS-EQ> 99,531
0
0
<LONG-TERM-DEBT-NET> 83,917
<SHORT-TERM-NOTES> 20,850
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 350
0
<CAPITAL-LEASE-OBLIGATIONS> 11,227
<LEASES-CURRENT> 574
<OTHER-ITEMS-CAPITAL-AND-LIAB> 119,748
<TOT-CAPITALIZATION-AND-LIAB> 336,197
<GROSS-OPERATING-REVENUE> 214,123
<INCOME-TAX-EXPENSE> 9,178
<OTHER-OPERATING-EXPENSES> 181,582
<TOTAL-OPERATING-EXPENSES> 190,760
<OPERATING-INCOME-LOSS> 23,363
<OTHER-INCOME-NET> 468
<INCOME-BEFORE-INTEREST-EXPEN> 23,831
<TOTAL-INTEREST-EXPENSE> 9,003
<NET-INCOME> 14,828
0
<EARNINGS-AVAILABLE-FOR-COMM> 14,828
<COMMON-STOCK-DIVIDENDS> 14,318
<TOTAL-INTEREST-ON-BONDS> 7,910
<CASH-FLOW-OPERATIONS> 35,153
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>