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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, 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)
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, 1999
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 35 of this report.
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CANAL ELECTRIC COMPANY
FORM 10-K DECEMBER 31, 1998
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business.......................................... 3
General......................................... 3
ISO - New England............................... 4
Electric Industry Restructuring................. 4
Fuel Supply..................................... 5
Power Contracts................................. 6
Power Supply Commitments and
Support Agreements............................ 6
Construction and Financing...................... 7
Employees....................................... 7
Item 2. Properties........................................ 7
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....... 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................. 35
Signatures................................................... 43
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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 (the
Parent), which together with its subsidiaries is collectively referred to as
"COM/Energy."
In December 1998, the Parent signed an Agreement and Plan of Merger with
BEC Energy, the parent company of Boston Edison Company, that will create an
energy delivery company serving approximately 1.3 million customers located
entirely within Massachusetts including more than one million electric cus-
tomers in 81 communities and 240,000 gas customers in 51 communities. The
merger is expected to occur shortly after the satisfaction of certain con-
ditions, including receipt of certain regulatory approvals. The regulatory
approval process is expected to be completed during the second half of 1999.
The Company owned a generating station located in Sandwich, Massachu-
setts at the eastern end of the Cape Cod Canal until December 30, 1998 when
it was sold to an affiliate of The Southern Company of Atlanta, Georgia.
The station consists of two electric generating units: Canal Unit 1 is an
oil-fired facility with a rated capacity of 569 megawatts (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 was operated by the Company under an agreement with
Montaup which provided 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 Canal Unit 1 and Unit 2 generating assets were sold to an
affiliate of The Southern Company of Atlanta, Georgia on December 30, 1998.
The sale was conducted through an auction process initiated during 1997 in
response to electric industry restructuring legislation enacted in
Massachusetts in November 1997. 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 Parent.
The plant has a rated capacity of 1,150 MW.
For additional information pertaining to the Company's relationship with
COM/Energy's retail distribution companies, together with more extensive
information on the Company's participation in the Seabrook plant and on
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CANAL ELECTRIC COMPANY
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 or NEPOOL), which was formed in 1971 to provide for the joint
planning and operation of electric systems throughout New England. 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 COM/Energy'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.
Electric Industry Restructuring
On November 25, 1997, the Governor of Massachusetts signed into law the
Electric Industry Restructuring Act (the Act). This legislation provided,
among other things, that customers of retail electric utility companies who
take standard offer service receive a 10 percent rate reduction and be
allowed to choose their energy supplier, effective March 1, 1998. The Act
also provides that utilities be allowed full recovery of transition costs
subject to review and an audit process. The rate reduction mandated by the
legislation increases to 15 percent effective September 1, 1999 for
customers who continue to take standard offer service. A statewide ballot
referendum that sought to repeal the legislation was defeated by a wide
margin on November 3, 1998.
The Company, together with retail affiliates Cambridge Electric and
Commonwealth Electric had filed a comprehensive electric restructuring plan
with the DTE in November 1997, that was substantially approved by the DTE in
February 1998. The divestiture of the Company's non-nuclear generation
assets was an integral part of COM/Energy's restructuring plan and is
consistent with the Act.
On May 27, 1998, the Company selected an affiliate of Southern Energy
New England, L.L.C. (Southern Energy), an affiliate of The Southern Company
of Atlanta, Georgia, to buy Canal Units 1 and 2. As a result of
construction-related adjustments at the closing on December 30, 1998, the
final amount of proceeds from the sale of these units was approximately $395
million. These facilities represented 848.5 MW of electric capacity and had
a book value of $65.4 million.
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CANAL ELECTRIC COMPANY
On July 31, 1998, a divestiture filing was submitted to the FERC and the
DTE that requested approval of the sale of the generating assets to Southern
Energy. On October 30, 1998, the DTE approved the sale of assets to
Southern Energy. However, at that time, the DTE deferred ruling on the
allocation of the net proceeds from the sale of the Company's Units 1 and 2
between Cambridge Electric and Commonwealth Electric and on the rate of
return to be paid to their customers on the net proceeds from the sale over
an eleven-year period. The FERC approved the sale on November 12, 1998.
On December 23, 1998, the DTE approved the divestiture filing and
COM/Energy's proposal to establish a special purpose affiliate, Energy
Investment Services, Inc. (EIS), that will administer the above-book value
net proceeds from the sale of the Company's units with the goal of
preserving capital and maximizing earnings for the benefit of retail
customers. EIS will credit the proceeds and any return earned to the
accounts of Commonwealth Electric and Cambridge Electric, resulting in a
reduction in the transition costs to be billed to customers.
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 provided 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.) operated
the Company's fuel oil terminal and managed 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 was held in
inventory by ESCO Massachusetts, Inc. and delivered upon demand to the
Company's two day tanks.
During 1996, Unit 2 was converted to dual-fuel capability, residual fuel
oil and natural gas. The Company anticipated that dual-fuel capability
would result in future savings as the least expensive fuel was utilized.
The nuclear fuel contract and inventory information for Seabrook 1 has
been furnished to the Company by North Atlantic Energy Services Corporation
(NAESCO), the managing agent responsible for operation of the unit. Sea-
brook's requirement for nuclear fuel components are 100% covered through
2002 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
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CANAL ELECTRIC COMPANY
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 was 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 was
severally obligated to purchase one-quarter of the capacity and energy of
Canal Unit 1. Commonwealth Electric and Cambridge were jointly obligated to
purchase the remaining one-quarter of the unit's capacity and energy.
Agreements that would have Southern Energy assume responsibility for these
contracts following the sale of the unit were not approved by the FERC.
Similar contracts that were 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 were terminated on December 30, 1998. The price of power was based on a
two-part rate consisting of a demand charge and an energy charge. The
demand charge covered all expenses except fuel costs and included recovery
of the original investment. It also provided for any adjustments to that
investment over the economic lives of the units. The energy charge was
based on the cost of fuel and was billed to each purchaser in proportion to
its purchase of power. Purchasers were 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, and, prior to December 30, 1998, to
sell a portion of each company'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 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 COM/Energy'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(d) 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.
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CANAL ELECTRIC COMPANY
The Company is a 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 $11.1
million at December 31, 1998. In addition, the Company has an equity
interest in Phase II which amounted to $2.8 million in 1998 and $3.1 million
in 1997.
Construction and Financing
Information concerning the Company's financing and construction programs
is contained in Note 5(a) of Notes to Financial Statements filed under Item
8 of this report.
Employees
The Company had 109 regular employees, 82 (75%) were represented by the
Utility Workers' Union of America, A.F.L.-C.I.O. On December 31, 1998,
following the sale of the Company's generating assets, the Company had no
regular employees.
Item 2. Properties
Prior to the sale of the Company's generating assets to an affiliate of
The Southern Company of Atlanta, Georgia, on December 30, 1998, the Company
had operated a generating station located at the eastern end of the Cape Cod
Canal in Sandwich, Massachusetts. The station consisted 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.
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, 1998
One
(c) Frequency and Amount of Dividends Declared in 1998 and 1997
1998 1997
Per Share Per Share
Declaration Date Amount Declaration Date Amount
May 11, 1998 $ 2.65 April 25, 1997 $ 2.50
July 31, 1998 1.90 July 21, 1997 2.40
October 26, 1998 2.20 October 27, 1997 2.35
$ 6.75 December 22, 1997 2.15
$ 9.40
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, 1998 and
1997 and unit sales for these periods is shown below:
Years Ended Years Ended
December 31, December 31,
1998 and 1997 1997 and 1996
Increase (Decrease)
(Dollars in thousands)
Electric Operating Revenues $(32,290) (15.1)% $ 28,573 15.4 %
Operating Expenses:
Fuel used in production (25,744) (22.3) 36,192 45.7
Electricity purchased for resale (5,050) (90.2) (2,875) (33.9)
Other operation and maintenance 978 2.6 (3,844) (9.2)
Depreciation 1,333 6.9 532 2.8
Taxes -
Federal and state income (1,010) (11.0) (542) (5.6)
Local property and other (296) (8.4) 209 6.3
(29,789) (15.6) 29,672 18.4
Operating Income (2,501) (10.7) (1,099) (4.5)
Other Income 186,05539,755.3 (1,925) (80.4)
Income Before Interest Charges 183,554 770.2 (3,024) (11.3)
Interest Charges (735) (8.2) (1,278) (12.4)
Net Income $184,289 1,242.8 $ (1,746) (10.5)
Unit Sales Increase (MWH) 159,804 3.4 1,583,582 49.9
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
1998 3,136,328 1,485,797 295,539 - 4,917,664
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
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CANAL ELECTRIC COMPANY
Revenue, Fuel and Purchased Power
Operating revenues for 1998 decreased by $32.3 million or 15.1%, due
primarily to decreases in fuel used in production and electricity purchased
for resale, somewhat offset by a 3.4% increase in unit sales. The increase
in unit sales was due primarily to the increased availability of Unit 2 and
Seabrook 1. Somewhat offsetting the increase in unit sales was the
expiration of contracts for the purchase of electricity on behalf of
affiliated retail distribution companies.
During 1997, operating revenues increased 15.4% or $28.6 million due
primarily 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.
The decrease in fuel used in production in 1998 represents the lower
average cost of fuel oil. During 1997, the significant increases in fuel
used in production reflect the increased availability of Units 1 and 2 as
discussed above, partially offset by a decrease in the average cost of oil.
Fuel, purchased power and transmission costs (included in other operation
expense) represented approximately 46% of the total revenue dollar in 1998,
58% in 1997 and 49% in 1996 and averaged 1.9 cents per KWH in 1998 as
compared to 2.61 cents in 1997 and 2.86 cents in 1996.
Other Operating Expenses
During 1998, other operation decreased approximately $1.3 million or
4.6% due to the absence of amortization related to an abandoned nuclear unit
($584,000) and lower insurance and benefits costs ($293,000). Other
operation decreased approximately $2.3 million or 7.6% in 1997 due primarily
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.
Maintenance expense increased approximately $2.3 million or 22.1% due to
an increase in maintenance costs associated with the Unit 1 boiler plant and
related equipment ($3.8 million), offset, in part , by lower costs
associated with Unit 2 ($1.4 million). 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.
Depreciation and Taxes
In 1998, depreciation increased 6.9% reflecting a higher level of plant-
in-service and adjustments related to the sale of the Company's Units 1 and
2. 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.
Income tax expense declined 11% and 5.6% or approximately $1 million or
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CANAL ELECTRIC COMPANY
$500,000, respectively, in 1998 and 1997 due to a lower level of pre-tax
income from normal operations.
Other Income
The significant increase in other income during 1998 reflects the net
gain ($185.7 million) from the sale of the Company's Units 1 and 2 on
December 30, 1998. 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.
Interest Charges
The decrease in total interest charges during 1998 was due primarily to
a decrease in short-term interest ($698,000) reflecting a lower average
level of short-term debt. During 1997, total interest charges decreased by
approximately $1.3 million or 12.4% due primarily to a decrease in short-
term interest ($1,106,000) reflecting a lower average level of short-term
debt. The decrease in interest charges for 1997 also reflects the
retirement of Series A $19 million (7%) First Mortgage Bonds during the
second quarter of 1996.
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.
Merger with BEC Energy
The electric utility industry has continued to change in response to
legislative and regulatory mandates that are aimed at lowering prices for
energy by creating a more competitive marketplace. These pressures have
resulted in an increasing trend in the electric industry to seek competitive
advantages and other benefits through business combinations. On December 5,
1998, the Parent and BEC Energy (BEC), headquartered in Boston, Massachu-
setts, entered into an Agreement and Plan of Merger (the Merger Agreement).
Pursuant to the Merger Agreement, the Parent and BEC will be merged into a
new holding company to be known as NSTAR. The merger is expected to occur
shortly after the satisfaction of certain conditions, including the receipt
of certain regulatory approvals including that of the DTE. The regulatory
approval process is expected to be completed during the second half of 1999.
The merger will create an energy delivery company serving approximately
1.3 million customers located entirely within Massachusetts, including more
than one million electric customers in 81 communities and 240,000 gas
customers in 51 communities.
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CANAL ELECTRIC COMPANY
Shareholder votes on the merger will be held as part of each of the
Parent's and BEC's annual shareholder meetings scheduled for the second
quarter of 1999. The Merger Agreement may be terminated under certain
circumstances, including by any party if the merger is not consummated by
December 5, 1999, subject to an automatic extension of six months if the
requisite regulatory approvals have not yet been obtained by such date. The
merger will be accounted for using the purchase method of accounting.
Upon effectiveness of the merger, Thomas J. May, BEC's current Chairman,
President and Chief Executive Officer (CEO), will become the Chairman and
CEO of NSTAR. Russell D. Wright, the Parent's current President and CEO,
will become the President and Chief Operating Officer of NSTAR and will
serve on NSTAR's board of directors. Also, upon effectiveness of the merger,
NSTAR's board of directors will consist of the Parent's and BEC's current
trustees.
Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
computer program that has date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
temporary inability to process transactions or engage in normal business
activities. COM/Energy has been involved in Year 2000 compliancy since
1996.
COM/Energy, on a coordinated basis and with the assistance of RCG
Information Technologies and other consultants, is addressing the Year 2000
issue. COM/Energy has followed a five-phase process in its Year 2000
compliance efforts, as follows: Awareness (through a series of internal
announcements to employees and through contacts with vendors); Inventory
(all computers, applications and embedded systems that could potentially be
affected by the Year 2000 problem); Assessment (all applications or
components and the impact on overall business operations and a plan to
correct deficiencies and the cost to do so); Remediation (the modification,
upgrade or replacement of deficient hardware and software applications and
infrastructure modifications); and Testing (a detailed, comprehensive
testing program for the modified critical component, system or software that
involves the planning, execution and analysis of results).
COM/Energy's inventory phase required an assessment of all date sensi-
tive information and transaction processing computer systems and determined
that approximately 90% of its software systems needed some modifications or
replacement. Plans were developed and are being implemented to correct and
test all affected systems, with priorities assigned based on the importance
of the activity. COM/Energy has identified the software and hardware
installations that are necessary. All installations are expected to be
completed and tested by mid-1999.
COM/Energy has also inventoried its non-information technology systems
that may be date sensitive (facilities, electric and gas operations, energy
supply/production and distribution) that use embedded technology such as
micro-controllers and micro-processors. COM/Energy is approximately 86%
complete in its efforts to resolve non-compliance with Year 2000
requirements related to its non-information technology systems. COM/Energy
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CANAL ELECTRIC COMPANY
anticipates that these systems will be updated or replaced as necessary and
tested by mid-1999.
At present, the remediation phase for information technology as it
applies to hardware and non-technology issues is scheduled for completion by
June 1, 1999. The testing phase for Year 2000 compliance is approximately
70% complete and is scheduled to be concluded by June 30, 1999. All other
phases are complete.
Modifying and testing COM/Energy's information and transaction process-
ing systems from 1996 through 2000 is currently expected to cost
approximately $7 million, including approximately $900,000 incurred through
1997 and $3.1 million spent in 1998. Approximately $3 million is expected
to be spent in 1999 and 2000. Year 2000 costs have been expensed as
incurred and will continue to be funded from operations.
In addition to its internal efforts, COM/Energy has initiated formal
communications with its significant suppliers to determine the extent to
which COM/Energy may be vulnerable to its suppliers' failure to correct
their own Year 2000 issues. As of February 1, 1999, COM/Energy has received
responses from approximately 75% of those entities contacted, and nearly all
have indicated that they are or will be Year 2000 compliant. Failure of
COM/Energy's significant suppliers to address Year 2000 issues could have a
material adverse effect on COM/Energy's operations, although it is not
possible at this time to quantify the amount of business that might be lost
or the costs that could be incurred by COM/Energy. Contact with significant
vendors is continuing and inadequate or marginal responses are being pursued
by COM/Energy. COM/Energy is prepared to replace certain suppliers or to
initiate other contingency plans should these vendors not respond to
COM/Energy's satisfaction by July 1, 1999.
In addition, parts of the global infrastructure, including national
banking systems, electrical power grids, gas pipelines, transportation
facilities, communications and governmental activities, may not be fully
functional after 1999. Infrastructure failures could significantly reduce
COM/Energy's ability to acquire energy and its ability to serve its
customers as effectively as they are now being served. COM/Energy is
identifying elements of the infrastructure that are critical to its
operations and is obtaining information as to the expected Year 2000
readiness of these elements.
COM/Energy has started its contingency planning for critical operational
areas that might be effected by the Year 2000 issue if compliance by
COM/Energy is delayed. COM/Energy gas and electric operations currently
have emergency operating plans as well as information technology disaster
recovery plans as components of its standard operating procedures. These
plans will be enhanced to identify potential Year 2000 risks to normal
operations and the appropriate reaction to these potential failures
including contingency plans that may be required for any third parties that
fail to achieve Year 2000 compliance. All necessary contingency plans are
expected to be completed by June 30, 1999, although in certain cases,
especially infrastructure failures, there may be no practical alternative
course of action available to COM/Energy.
<PAGE>
<PAGE 14>
CANAL ELECTRIC COMPANY
COM/Energy is working with other energy industry entities, both region-
ally and nationally with respect to Year 2000 readiness and is cooperating
in the development of local and wide-scale contingency planning.
While COM/Energy believes its efforts to address the Year 2000 issue
will allow it to be successful in avoiding any material adverse effect on
COM/Energy's operations or financial condition, it recognizes that failing
to resolve Year 2000 issues on a timely basis would, in a "most reasonably
likely worst case scenario," significantly limit its ability to acquire and
distribute energy and process its daily business transactions for a period
of time, especially if such failure is coupled with third party or
infrastructure failures. Similarly, COM/Energy could be significantly
effected by the failure of one or more significant suppliers, customers or
components of the infrastructure to conduct their respective operations
after 1999. Adverse affects on COM/Energy could include, among other
things, business disruption, increased costs, loss of business and other
similar risks.
The foregoing discussion regarding Year 2000 project timing, effective-
ness, implementation and costs includes forward-looking statements that are
based on management's current evaluation using available information.
Factors that might cause material changes include, but are not limited to,
the availability of key Year 2000 personnel, the readiness of third parties,
and COM/Energy's ability to respond to unforeseen Year 2000 complications.
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, however their impact on future operations, capital costs and
construction schedules is not expected to be significant since all of the
Company's non-nuclear generating assets were sold in 1998.
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.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements required by this item are filed
herewith on pages 15 through 34 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, 1998 and 1997, and the related
statements of income, retained earnings and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended
December 31, 1998, 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 18, 1999.
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<PAGE 16>
CANAL ELECTRIC COMPANY
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PART II.
FINANCIAL STATEMENTS
Balance Sheets at December 31, 1998 and 1997
Statements of Income for the Years Ended December 31, 1998, 1997 and 1996
Statements of Retained Earnings for the Years Ended December 31, 1998, 1997
and 1996
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996
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, 1998, 1997 and 1996
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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CANAL ELECTRIC COMPANY
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
(Dollars in thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost $265,612 $469,861
Less - Accumulated depreciation
and amortization 77,081 197,844
188,531 272,017
Add - Construction work in progress 1,852 2,228
Nuclear fuel in process 1,568 193
191,951 274,438
INVESTMENTS
Equity in corporate joint venture 2,800 3,075
CURRENT ASSETS
Cash 301,179 18
Accounts receivable -
Affiliated companies 13,642 12,159
Other 9,736 15,397
Unbilled revenues 659 86
Inventories, at average cost -
Electric production fuel oil - 806
Materials and supplies 1,268 1,268
Prepaid property taxes - 840
Other 884 923
327,368 31,497
DEFERRED CHARGES
Regulatory assets 18,745 17,413
Other 5,840 9,774
24,585 27,187
$546,704 $336,197
The accompanying notes are an integral part of these financial statements.
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<PAGE 18>
CANAL ELECTRIC COMPANY
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
CAPITALIZATION AND LIABILITIES
1998 1997
(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 241,965 53,130
288,366 99,531
Long-term debt, including premiums, less
current sinking fund requirements - 83,917
288,366 183,448
CAPITAL LEASE OBLIGATIONS 10,551 11,227
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks - 20,850
- 20,850
Other Current Liabilities -
Current sinking fund requirements - 350
Accounts payable -
Affiliated companies 8,678 1,028
Other 31,327 21,335
Accrued taxes -
Local property and other 30 844
Income 121,712 2,054
Capital lease obligations 568 574
Accrued interest and other 3,309 6,174
165,624 32,359
165,624 53,209
DEFERRED CREDITS
Accumulated deferred income taxes 64,383 69,447
Unamortized investment tax credits 8,427 10,967
Other 9,353 7,899
82,163 88,313
COMMITMENTS AND CONTINGENCIES
$546,704 $336,197
The accompanying notes are an integral part of these financial statements.
<PAGE>
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CANAL ELECTRIC COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
(Dollars in thousands)
ELECTRIC OPERATING REVENUES
Sales to affiliated companies $113,024 $124,903 $107,842
Sales to non-affiliated companies 68,809 89,220 77,708
181,833 214,123 185,550
OPERATING EXPENSES
Fuel used in production 89,569 115,313 79,121
Electricity purchased for resale 551 5,601 8,476
Other operation 26,426 27,707 29,992
Maintenance 12,468 10,209 11,768
Depreciation 20,547 19,214 18,682
Taxes -
Income 8,168 9,178 9,720
Local property 2,510 2,770 2,603
Payroll and other 732 768 726
160,971 190,760 161,088
OPERATING INCOME 20,862 23,363 24,462
OTHER INCOME
Gain from sale of assets 329,603 - -
Taxes and transaction costs
related to sale (143,856) - -
Other 776 468 2,393
186,523 468 2,393
INCOME BEFORE INTEREST CHARGES 207,385 23,831 26,855
INTEREST CHARGES
Long-term debt 7,854 7,910 8,017
Other interest charges 533 1,231 2,337
Allowance for borrowed funds used
during construction (119) (138) (73)
8,268 9,003 10,281
NET INCOME $199,117 $ 14,828 $ 16,574
The accompanying notes are an integral part of these financial statements.
<PAGE>
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CANAL ELECTRIC COMPANY
STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
(Dollars in thousands)
Balance at beginning of year $ 53,130 $52,620 $52,070
Add (Deduct)
Net income 199,117 14,828 16,574
Cash dividends on common stock (10,282) (14,318) (16,024)
Balance at end of year $241,965 $53,130 $52,620
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE 21>
CANAL ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $199,117 $ 14,828 $ 16,574
Gain from sale of assets (329,603) - -
Effects of noncash items -
Depreciation and amortization 22,839 22,156 23,485
Deferred income taxes (7,673) (973) (963)
Investment tax credits (2,539) (526) (527)
Earnings from corporate joint venture (454) (233) (498)
Dividends from corporate joint venture 729 479 549
Change in working capital, exclusive
of cash and interim financing -
Accounts receivable 4,178 (4,872) (3,882)
Unbilled revenues (573) 589 (237)
Income taxes 119,658 2,118 (3,223)
Local property and other taxes 26 4 19
Accounts payable and other 15,266 5,473 (1,595)
All other operating items, net (6,908) (3,890) 565
Net cash provided by operating activities 14,063 35,153 30,267
INVESTING ACTIVITIES
Proceeds from sale of generating assets 408,017 - -
Additions to property, plant and
equipment (exclusive of AFUDC) (5,368) (7,391) (14,557)
Allowance for borrowed funds used
during construction (119) (138) (73)
Net cash from (used for)investing activities 402,530 (7,529) (14,630)
FINANCING ACTIVITIES
Proceeds from (payment of)
short-term borrowings (20,850) (5,700) 3,125
Proceeds from (payment of)
affiliate borrowings - (7,250) 1,385
Payment of dividends (10,282) (14,318) (16,024)
Long-term debt issues refunded (83,950) - (3,420)
Retirement of long-term debt through
sinking funds (350) (350) (703)
Net cash used for financing activities (115,432) (27,618) (15,637)
Net increase in cash 301,161 6 -
Cash at beginning of period 18 12 12
Cash and cash equivalents at end of period $301,179 $ 18 $ 12
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid (net of capitalized
amounts) $ 9,028 $ 8,700 $ 9,959
Income taxes paid $10,796 $ 8,996 $14,128
The accompanying notes are an integral part of these financial statements.
<PAGE>
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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). The Parent, together with its
subsidiaries is referred to as "COM/Energy." The Parent 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. On December 30, 1998,
in response to the significant changes that have taken place in the utility
industry, COM/Energy sold substantially all of its non-nuclear generating
assets, including the Company's generating station, to affiliates of The
Southern Company of Atlanta, Georgia. The Company's generating station ,
located in Sandwich, Massachusetts consisted 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
had been 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 had 109 regular employees prior to the sale of Canal Units 1
and 2 on December 30, 1998. At December 31, 1998, the Company had no
regular employees.
(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
economic effects of regulation in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
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CANAL ELECTRIC COMPANY
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.
The principal regulatory assets included in deferred charges at December
31, 1998 and 1997 were as follows:
1998 1997
(Dollars in thousands)
Seabrook related costs $ 3,008 $ 4,324
Deferred income taxes 15,737 13,089
Total regulatory assets $18,745 $17,413
As of December 31, 1998, all of the Company's regulatory assets are
reflected in rates charged to customers over a weighted average period of
approximately 11 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, provides that 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 and provides that certain future costs may be
deferred to achieve or maintain the rate reductions that the restructuring
bill mandates. 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.
(c) Divestiture of Generation Assets
The cost of transitioning to competition will be mitigated, in part, by
the sale of COM/Energy's non-nuclear generating assets. On May 27, 1998,
COM/Energy agreed to sell substantially all of its non-nuclear generating
assets (984 MW) to affiliates of The Southern Company of Atlanta, Georgia.
The sale was conducted through an auction process that was outlined in a
restructuring plan filed with the DTE in November 1997 in conjunction with
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CANAL ELECTRIC COMPANY
the state's industry restructuring legislation enacted in 1997. The sale
was approved by the DTE on October 30, 1998 and by the FERC on November 12,
1998. Proceeds from the sale of the Company's non-nuclear generating
assets, after construction-related adjustments at the closing that occurred
on December 30, 1998, amounted to approximately $395 million or 6 times
their book value of approximately $65.4 million. The proceeds from the
sale, net of book value, transaction costs and certain other adjustments
amounted to approximately $298 million and will be used to reduce transition
costs of Cambridge Electric and Commonwealth Electric related to electric
industry restructuring that otherwise would have been collected through a
non-bypassable transition charge.
COM/Energy established Energy Investment Services, Inc. as the vehicle to
invest the net proceeds from the sale of the Company's generation assets.
These proceeds will be invested in a conservative portfolio of securities
that is designed to maintain principal and earn a reasonable return. Both
the principal amount and income earned will be used to reduce the transition
costs that would otherwise be billed to customers of Cambridge Electric and
Commonwealth Electric.
(d) Transactions with Affiliates
Transactions between the Company and other COM/Energy 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 has functioned 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 COM/Energy 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)
1998 $70,283 $ 3,667 $39,074
1997 76,859 8,885 39,159
1996 52,035 11,882 43,925
(e) Other Major Customers
The Company is a wholesale electric generating company selling power
under life-of-the-unit contracts, approved by FERC to Boston Edison Company,
Montaup Electric Company and New England Power Company, (unaffiliated
utilities). Prior to the sale of Canal Units 1 and 2 on December 30, 1998,
each utility was obligated to purchase one-quarter of the capacity and
energy of Canal Unit 1.
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CANAL ELECTRIC COMPANY
(f) 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.
(g) 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
4.71% in 1998, 4.45% in 1997 and 4.42% in 1996.
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.
(h) Maintenance
Expenditures for repairs of property and replacement and renewal of items
determined to be less than units of property were charged to maintenance
expense. Additions, replacements and renewals of property considered to be
units of property, were charged to the appropriate plant accounts. Upon
retirement, accumulated depreciation was charged with the original cost of
property units and the cost of removal net of salvage.
(i) 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 5.75% in 1998, 6% in 1997 and 6.25% in 1996.
(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 Parent and it makes tax payments or
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CANAL ELECTRIC COMPANY
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
years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
(Dollars in thousands)
Federal:
Current $109,267 $ 9,128 $ 9,511
Deferred (6,775) (764) (577)
Investment tax credits (2,539) (526) (527)
99,953 7,838 8,407
State:
Current 21,413 1,558 1,747
Deferred (776) (133) (223)
20,637 1,425 1,524
120,590 9,263 9,931
Amortization of regulatory liability
relating to deferred income taxes (122) (76) (163)
Total $120,468 $ 9,187 $ 9,768
Federal and state income taxes
charged to:
Operating expense $ 8,168 $ 9,178 $ 9,720
Other income 112,300 9 48
$120,468 $ 9,187 $ 9,768
The significant change in the provision for income taxes in 1998 reflects
the current tax related to the sale of the generating assets.
Deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the year in which the
differences are expected to reverse.
Accumulated deferred income taxes consisted of the following:
1998 1997
(Dollars in thousands)
Liabilities
Property-related $74,585 $78,706
Seabrook nonconstruction 707 707
All other 1,832 1,645
77,124 81,058
Assets
Investment tax credit 7,844 7,078
Regulatory liability 2,102 2,180
All other 2,244 1,490
12,190 10,748
Accumulated deferred income taxes, net $64,934 $70,310
The net year-end deferred income tax liability above includes a current
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CANAL ELECTRIC COMPANY
deferred tax liability of $551,000 and $863,000 in 1998 and 1997,
respectively, which is included in accrued income taxes in the accompanying
Balance Sheets.
The total income tax provision set forth on the previous page represents
38% in 1998, and 37% in 1997 and 1996, of income before such taxes. The
following table reconciles the statutory federal income tax rate to these
percentages:
1998 1997 1996
Federal statutory rate 35% 35% 35%
Federal income tax expense at statutory levels $111,854 $8,405 $9,220
Increase (Decrease) from statutory rate:
Tax versus book depreciation 1,207 1,515 1,479
State tax, net of federal tax benefit 13,414 927 991
Additional FIT sale of generation assets (2,596) - -
Amortization of investment tax credits (2,539) (526) (527)
Excess deferred reserves (122) (76) (163)
Reversals of capitalized expenses (561) (560) (559)
Other (189) (498) (673)
$120,468 $9,187 $9,768
Effective federal tax rate 38% 37% 37%
(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 1998 1997
(Dollars in thousands)
First Mortgage Bonds -
Series B, 8.85%, due 2006 $35,000 $ - $33,950
Series E, 7 3/8%, due 2020 10,000 - 10,000
Series F, 9 7/8%, due 2020 40,000 - 40,000
$ - $83,950
On December 30, 1998, upon the sale of the Company's Units 1 and 2, a
portion of the proceeds from the sale was used to retire all of the
Company's long-term debt.
The Series B First and General Mortgage Bonds required an annual sinking
fund payment of $350,000. The requirement could be met by payment,
repurchase of bonds or certification of an amount of property additions
equal to 60% of bondable property (as 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
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<PAGE 28>
CANAL ELECTRIC COMPANY
National Bank of Boston, the Trustee.
(b) Notes Payable to Banks
The Company and other COM/Energy 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,
1998, COM/Energy companies had $122 million of committed lines of credit
that will expire at varying intervals in 1999. These lines are normally
renewed upon expiration and require annual fees of up to .1875% of the
individual line. At December 31, 1998, COM/Energy'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 5.7%
in 1998 and 5.8% in 1997. The Company had no notes payable to banks at
December 31, 1998 and $20,850,000 at December 31, 1997.
(c) Advances from Affiliates
The Company had no short-term notes payable to the Parent at December
31, 1998 and 1997. 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 8.3% in 1998
and 8.5% in 1997.
The Company is a member of the COM/Energy Money Pool (the Pool), an
arrangement among the subsidiaries of the Parent, 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, 1998
and 1997. Rates on these borrowings averaged 5.3% in 1998 and 5.4% in 1997.
(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, 1998 and 1997 are as follows:
1998 1997
(Dollars in thousands)
Carrying Fair Carrying Fair
Value Value Value Value
Long-term Debt $ - $ - $84 267 $102 121
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
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CANAL ELECTRIC COMPANY
debt with the same remaining maturity. The fair value shown above does not
purport to represent the amount at which the obligations would be settled.
(5) Commitments and Contingencies
(a) Construction
The Company is engaged in a continuous construction program presently
estimated at $9.7 million for the five-year period 1999 through 2003. Of
that amount, $1.2 million is estimated for 1999. 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
COM/Energy'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 and DTE
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:
1998 1997
(Dollars in thousands)
Utility plant-in-service $232,471 $232,471
Nuclear fuel 23,581 22,207
Accumulated depreciation
and amortization (71,929) (64,379)
Construction work in progress 1,852 1,036
$185,975 $191,335
1998 1997 1996
(Dollars in thousands)
Operating expenses:
Fuel $ 1,274 $ 1,471 $ 1,727
Other operation 4,369 4,206 4,091
Maintenance 1,437 2,364 990
Depreciation 6,577 6,314 6,544
Amortization 1,319 1,319 1,319
$14,976 $15,674 $14,671
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
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 $489 million in current dollars. The Company's share
of this liability (approximately $17.2 million), less its share of the
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CANAL ELECTRIC COMPANY
market value of the assets held in a decommissioning trust (approximately
$3.2 million), is approximately $14 million at December 31, 1998.
(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, however their impact on future operations, capital costs and
construction schedules is not expected to be significant since all of the
Company's non-nuclear generating assets were sold in 1998.
(6) Dividend Restriction
At December 31, 1998, no retained earnings were 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.
The following tables set forth the change in the pension benefit
obligation and plan assets as well as the plan's funded status reconciled to
the amount included in the financial statements:
1998 1997
(Dollars in thousands)
Change in benefit obligation
Obligation at beginning of year $ 22,119 $ 17,576
Service cost 509 524
Interest cost 1,542 1,314
Actuarial loss 2,526 3,708
Benefits paid (1,346) (1,003)
Obligation at end of year $ 25,350 $ 22,119
1998 1997
(Dollars in thousands)
Change in plan assets
Fair value of plan assets at
beginning of year $ 20,287 $ 17,523
Actual return on plan assets 1,576 3,145
Employer contributions 478 622
Benefits paid (1,346) (1,003)
Fair value of plan assets at
end of year $ 20,995 $ 20,287
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CANAL ELECTRIC COMPANY
1998 1997
(Dollars in thousands)
Funded status $ (4,355) $ (1,832)
Unrecognized transition obligation 50 66
Unrecognized prior service cost 373 426
Unrecognized net actuarial loss 3,467 951
Prepaid (accrued) benefit cost $ (465) $ (389)
Weighted-average assumptions as of December 31 were as follows:
1998 1997
Discount rate 6.50% 7.00%
Expected return on plan assets 9.00 8.75
Rate of increase in future compensation 3.75 3.75
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.
Components of net periodic pension cost were as follows:
1998 1997 1996
(Dollars in thousands)
Service cost $ 509 $ 524 $ 527
Interest cost 1,542 1,314 1,254
Expected return on plan assets (1,566) (1,373) (1,236)
Amortization of transition
obligation 16 18 18
Amortization of prior service cost 53 54 54
Total 554 537 617
Transfers from affiliates, net 206 372 347
Less: Amounts capitalized
and deferred 171 206 224
Net periodic pension cost $ 589 $ 703 $ 740
The net periodic pension cost reflects the use of the projected unit
credit method which is also the actuarial cost method used in determining
future funding of the plan.
(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
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CANAL ELECTRIC COMPANY
plan pursuant to section 401(h) of the Code to fund a portion of its
postretirement benefit obligation.
The following tables set forth the change in the postretirement benefit
obligation and plan assets as well as the plan's funded status reconciled to
the amount included in the financial statements:
1998 1997
(Dollars in thousands)
Change in benefit obligation
Obligation at beginning of year $ 7,634 $ 6,586
Service cost 179 176
Interest cost 533 493
Actuarial loss (gain) (244) 612
Participant contributions 7 3
Benefits paid (365) (236)
Obligation at end of year $ 7,744 $ 7,634
1998 1997
(Dollars in thousands)
Change in plan assets
Fair value of plan assets at
beginning of year $ 3,790 $ 2,825
Actual return on plan assets 230 543
Employer contributions 610 655
Participant contributions 7 3
Benefits paid (365) (236)
Fair value of plan assets at
end of year $ 4,272 $ 3,790
Funded status $ (3,472) $ (3,844)
Unrecognized transition obligation 3,481 3,730
Unrecognized net actuarial loss (9) 114
Prepaid (accrued) benefit cost $ - $ -
Weighted-average assumptions as of December 31 were as follows:
1998 1997
Discount rate 6.50% 7.00%
Expected return on plan assets 9.00 8.75
Rate of increase in future compensation 3.75 3.75
For measurement purposes, a 6.50% annual rate of increase in the per
capita cost of covered medical claims was assumed for 1999. The rates were
assumed to decrease gradually to 4.5% for 2007 and remain at that level
thereafter. Dental claims and Medicare Part B premiums are expected to
increase at 4.5% and 3.1%, respectively.
Plan assets consist primarily of fixed-income and equity securities.
Fluctuations in the fair market value of plan assets will affect the periodic
postretirement benefit cost in future years.
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CANAL ELECTRIC COMPANY
Components of net periodic postretirement benefit cost were as follows:
1998 1997 1996
(Dollars in thousands)
Service cost $ 179 $ 176 $ 187
Interest cost 533 493 489
Expected return on plan assets (351) (263) (194)
Amortization of transition obligation 249 249 249
Total 610 655 731
Transfers from affiliates, net 236 452 447
Add: Net amortization of deferrals (117) (234) 1,320
Less: Amounts capitalized and deferred 102 63 90
Net periodic postretirement
benefit cost $ 627 $ 810 $ 2,408
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for health care plans. A one-percentage point change in
assumed healthcare cost trend rates would have the following effects:
One-Percentage-Point
Increase Decrease
(Dollars in thousands)
Effect on total of service and
interest cost components $ 85 $ (78)
Effect on postretirement
benefit obligation $ 695 $(682)
(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 $244,000 in 1998, $256,000 in 1997 and $261,000 in
1996.
(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.
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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, 1998:
Operating Leases Capital Leases
(Dollars in thousands)
1999 $ 253 $ 1,770
2000 253 1,704
2001 253 1,643
2002 253 1,581
2003 248 1,520
Beyond 2003 745 15,422
Total future minimum lease payments $2,005 23,640
Less:Estimated interest element
included therein 12,521
Estimated present value of future
minimum lease payments $11,119
Total rent expense for all operating leases, except those with terms
of a month or less, amounted to $356,000 in 1998, $575,000 in 1997 and
$475,000 in 1996. There were no contingent rentals and no sublease rentals
for the years 1998, 1997 and 1996.
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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 Schedule
(page 16).
(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, 1998, 1997 and 1996
(page 42).
(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).
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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 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).
10.1.3 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).
10.1.4 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:
10.1.4.1 First through Fifth Amendments to 10.1.4 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).
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CANAL ELECTRIC COMPANY
10.1.4.2 Sixth through Eleventh Amendments to 10.1.4 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).
10.1.4.3 Twelfth and Thirteenth Amendments to 10.1.4 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).
10.1.4.4 Fourteenth Amendment to 10.1.4 dated June 1, 1982 (Exhibit 3 to the
CE Form 10-Q (June 1982), File No. 2-7749).
10.1.4.5 Fifteenth and Sixteenth Amendments to 10.1.4 dated April 27, 1984
and June 15, 1984, respectively (Exhibit 1 to the CEC Form 10-Q
(June 1984), File No. 2-30057).
10.1.4.6 Seventeenth Amendment to 10.1.4 dated March 8, 1985 (Exhibit 1 to
the CEC Form 10-Q (March 1985), File No. 2-30057).
10.1.4.7 Eighteenth Amendment to 10.1.4 dated March 14, 1986 (Exhibit 1 to
the CEC Form 10-Q (March 1986), File No. 2-30057).
10.1.4.8 Nineteenth Amendment to 10.1.4 dated May 1, 1986 (Exhibit 1 to the
CEC Form 10-Q (June 1986), File No. 2-30057).
10.1.4.9 Twentieth Amendment to 10.1.4 dated September 19, 1986 (Exhibit 1
to the CEC Form 10-K for 1986, File No. 2-30057).
10.1.4.10 Twenty-First Amendment to 10.1.4 dated November 12, 1987 (Exhibit 1
to the CEC Form 10-K for 1987, File No. 2-30057).
10.1.4.11 Twenty-Second Amendment and Settlement Agreement to 10.1.4 dated
January 13, 1989 (Exhibit 4 to the CEC 1988 Form 10-K, File No. 2-
30057).
10.1.5 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).
10.1.5.1 Supplement to 10.1.5 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).
10.1.5.2 Amendment to 10.1.5 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).
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CANAL ELECTRIC COMPANY
10.1.6 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).
10.1.6.1 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).
10.1.7 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).
10.1.7.1 First through Third Amendments to 10.1.7 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).
10.1.7.2 Fifth through Seventh Amendments to 10.1.7 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).
10.1.7.3 Fourth and Eighth Amendments to 10.1.7 as amended July 1, 1987 and
August 1, 1988, respectively (Exhibit 3 to the CEC Form 10-Q
(September 1988), File No. 2-30057).
10.1.7.4 Ninth and Tenth Amendments to 10.1.7 as amended November 1, 1988
and January 15, 1989, respectively (Exhibit 2 to the CEC 1988 Form
10-K, File No. 2-30057).
10.1.7.5 Eleventh Amendment to 10.1.7 as amended November 1, 1989 (Exhibit 4
to the CEC 1989 Form 10-K, File No. 2-30057).
10.1.7.6 Twelfth Amendment to 10.1.7 as amended April 1, 1990 (Exhibit 1 to
the CEC Form 10-Q (June 1990) File No. 2-30057).
10.1.8 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).
10.1.9 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).
10.1.10 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).
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CANAL ELECTRIC COMPANY
10.1.10.1 Amendment No. 1 to 10.1.10 as amended May 1, 1986 (Exhibit 6 to the
CEC Form 10-Q (March 1987), File No. 2-30057).
10.1.10.2 Amendment No. 2 to 10.1.10 as amended September 1, 1987 (Exhibit 3
to the CEC Form 10-Q (September 1987), File No. 2-30057).
10.1.11 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).
10.1.12 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).
10.1.13 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).
10.1.13.1 Amendments Nos. 1 and 2 to 10.1.13 as amended May 1, 1986 and
February 1, 1987, respectively (Exhibit 5 to the CEC Form 10-Q
(March 1987), File No. 2-30057).
10.1.13.2 Amendments Nos. 3 and 4 to 10.1.13 as amended June 1, 1987 and
September 1, 1987, respectively (Exhibit 5 to the CEC Form 10-Q
(September 1987), File No. 2-30057).
10.1.14 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).
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).
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CANAL ELECTRIC COMPANY
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).
10.2.1.4 Fourth 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, 1998 (Exhibit 1 to CES
Form 10-K/A Amendment No. 1 (April 29, 1998), 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).
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).
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CANAL ELECTRIC COMPANY
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, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
December 31, 1998.
<PAGE>
<PAGE 42>
<TABLE>
SCHEDULE I
CANAL ELECTRIC COMPANY
INVESTMENTS IN, EQUITY EARNINGS OF,
AND DIVIDENDS RECEIVED FROM RELATED PARTIES
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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 -
YEAR ENDED DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C>
New England Hydro-Transmission
Electric Company, Inc. $ 1,869 116,158 $ 273 $ 423 $1,719
New England Hydro-Transmission
Corporation 1,206 563.710 181 306 1,081
Total $ 3,075 $ 454 $ 729 $2,800
YEAR ENDED DECEMBER 31, 1997
New England Hydro-Transmission
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
YEAR ENDED DECEMBER 31, 1996
New England Hydro-Transmission
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
<FN>
In 1998 New England Hydro-Transmission Electric Company, Inc. (NEHTEC) repurchased 8.1% (10,249.2 shares) of
its outstanding shares at $14.15 per share. The Company received proceeds of $145,028. In 1997 NEHTEC
repurchased 7.5% (10,249.2 shares) of its outstanding shares at $14.20 per share. The Company received
proceeds of $145,539. During 1998, 1997 and 1996, New England Hydro-Transmission Corporation (NEHTC)
repurchased 10.1% (63.2 shares), 6.85% (46.124 shares) and 6.52% (61.495 shares), respectively, of its
outstanding shares. The Company received proceeds of $115,910 ($1,833.92 per share), $85,207 ($1,847.46 per
share) and $112,616 ($1,831.30 per share) for 1998, 1997 and 1996,respectively. Receipts from the
repurchase of shares are included with dividends.
</TABLE>
<PAGE>
<PAGE 43>
CANAL ELECTRIC COMPANY
FORM 10-K DECEMBER 31, 1998
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: R. D. WRIGHT
Russell D. Wright,
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:
R. D. WRIGHT March 31, 1999
Russell D. Wright,
Chairman of the Board and
Chief Executive Officer
DEBORAH A. McLAUGHLIN March 31, 1999
Deborah A. McLaughlin
President and Chief Operating Officer
Principal Financial Officer:
JAMES D. RAPPOLI March 31, 1999
James D. Rappoli
Financial Vice President and Treasurer
A majority of the Board of Directors:
R. D. WRIGHT March 31, 1999
Russell D. Wright, Director
DEBORAH A. McLAUGHLIN March 31, 1999
Deborah A. McLaughlin, Director
JAMES D. RAPPOLI March 31, 1999
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, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
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