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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549-1004
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 2-7909
CAMBRIDGE ELECTRIC LIGHT COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1144610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Main Street, Cambridge, Massachusetts 02142-9150
(Address of principal executive offices) (Zip Code)
(617) 225-4000
(Registrant's telephone number, including area code)
(Former name, address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [ x ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock May 1, 1998
Common Stock, $25 par value 346,600 shares
The Company meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q as a wholly-owned subsidiary and is therefore filing this
Form with the reduced disclosure format.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CAMBRIDGE ELECTRIC LIGHT COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
ASSETS
(Dollars in thousands)
March 31, December 31,
1998 1997
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost $164,609 $163,914
Less - Accumulated depreciation 66,698 63,706
97,911 100,208
Add - Construction work in progress 845 757
98,756 100,965
INVESTMENTS
Equity in nuclear electric power companies 10,155 9,849
Other 5 5
10,160 9,854
CURRENT ASSETS
Cash 516 521
Accounts receivable
Affiliates 4,498 2,743
Customers 14,165 12,483
Unbilled revenues 1,744 3,047
Prepaid taxes -
Income 327 1,192
Property 848 1,697
Inventories and other 1,940 1,977
24,038 23,660
DEFERRED CHARGES
Regulatory assets 70,688 70,466
Other 2,554 2,176
73,242 72,642
$206,196 $207,121
See accompanying notes.
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CAMBRIDGE ELECTRIC LIGHT COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
March 31, December 31,
1998 1997
(Unaudited)
CAPITALIZATION
Common Equity -
Common stock, $25 par value -
Authorized and outstanding -
346,600 shares, wholly-owned by
Commonwealth Energy System (Parent) $ 8,665 $ 8,665
Amounts paid in excess of par value 27,953 27,953
Retained earnings 14,316 11,607
50,934 48,225
Long-term debt, including premiums, less
maturing debt and current sinking fund
requirements 7,402 17,402
58,336 65,627
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 25,225 19,000
Advances from affiliates 4,070 11,290
Maturing long-term debt 10,000 -
39,295 30,290
Other Current Liabilities -
Current sinking fund requirements 100 100
Accounts payable
Affiliates 1,791 4,144
Other 8,359 8,076
Accrued local property and other taxes 1,742 1,706
Accrued interest 175 460
Other 6,072 3,830
18,239 18,316
57,534 48,606
DEFERRED CREDITS
Accumulated deferred income taxes 15,268 15,135
Purchased power contracts 63,561 66,223
Unamortized investment tax credits and other 11,497 11,530
90,326 92,888
COMMITMENTS AND CONTINGENCIES
$206,196 $207,121
See accompanying notes.
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CAMBRIDGE ELECTRIC LIGHT COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands - unaudited)
1998 1997
ELECTRIC OPERATING REVENUES $27,571 $33,065
OPERATING EXPENSES
Electricity purchased for resale,
transmission and fuel 15,026 23,207
Other operation and maintenance 5,128 6,063
Depreciation 1,501 1,119
Taxes -
Income 1,841 419
Local property 765 777
Payroll and other 203 262
24,464 31,847
OPERATING INCOME 3,107 1,218
OTHER INCOME 405 438
INCOME BEFORE INTEREST CHARGES 3,512 1,656
INTEREST CHARGES
Long-term debt 361 430
Other interest charges 442 377
803 807
NET INCOME 2,709 849
RETAINED EARNINGS -
Beginning of period 11,607 9,233
End of period $14,316 $10,082
See accompanying notes.
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CAMBRIDGE ELECTRIC LIGHT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands - unaudited)
1998 1997
OPERATING ACTIVITIES
Net income $ 2,709 $ 849
Effects of noncash items -
Depreciation 1,501 1,119
Deferred income taxes and investment tax
credits, net 120 99
Earnings from corporate joint ventures (306) (336)
Dividends from corporate joint ventures - 91
Change in working capital, exclusive of cash and
interim financing (460) (1,581)
Transition costs deferral (2,780) -
All other operating items 1,187 321
Net cash provided by operating activities 1,971 562
INVESTING ACTIVITIES
Additions to property, plant and equipment (981) (873)
FINANCING ACTIVITIES
Proceeds from short-term borrowings 6,225 3,275
Payments to affiliates (7,220) (1,395)
Net cash (used for) provided by financing activities (995) 1,880
Net increase (decrease) in cash (5) 1,569
Cash at beginning of period 521 143
Cash at end of period $ 516 $ 1,712
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 1,038 $ 979
Income taxes $ 895 $ 370
See accompanying notes.
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CAMBRIDGE ELECTRIC LIGHT COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) General Information
Cambridge Electric Light Company (the Company) is a wholly-owned subsid-
iary of Commonwealth Energy System. The parent company is referred to in
this report as the "System" and together with its subsidiaries is collec-
tively referred to as "the system." The System is an exempt public utility
holding company under the provisions of the Public Utility Holding Company
Act of 1935 and, in addition to its investment in the Company, has interests
in other utility and several nonregulated companies.
The Company has 144 regular employees including 107 (74%) represented by
a collective bargaining unit. Upon expiration of the existing collective
bargaining agreement on September 1, 1998, a new agreement, which has
already been ratified, will become effective through March 1, 2001.
Employee relations have generally been satisfactory.
(2) Significant Accounting Policies
(a) Principles of Accounting
The Company's significant accounting policies are described in Note 2 of
Notes to Financial Statements included in its 1997 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. For interim
reporting purposes, the Company follows these same basic accounting policies
but considers each interim period as an integral part of an annual period
and makes allocations of certain expenses to interim periods based upon
estimates of such expenses for the year.
The unaudited financial statements for the periods ended March 31, 1998
and 1997 reflect, in the opinion of the Company, all adjustments necessary
to summarize fairly the results for such periods. In addition, certain
prior period amounts are reclassified from time to time to conform with the
presentation used in the current period's financial statements.
Income tax expense is recorded using the statutory rates in effect
applied to book income subject to tax recorded in the interim period.
The results for interim periods are not necessarily indicative of
results for the entire year because of seasonal variations in the consump-
tion of energy.
(b) Regulatory Assets and Liabilities
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).
Based on the current regulatory framework, the Company accounts for the
economic effects of regulation in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." The Company has established
various regulatory assets in cases where the DTE and/or the FERC have
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CAMBRIDGE ELECTRIC LIGHT COMPANY
permitted or are expected to permit recovery of specific costs over time.
Similarly, the regulatory liabilities established by the Company are
required to be refunded to customers over time. In the event the criteria
for applying SFAS No. 71 are no longer met, the accounting impact would be
an extraordinary, noncash 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 that restricts 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 including those related to generation,
are probable of future recovery.
As a result of electric industry restructuring, the Company discontinued
application of accounting principles applied to rate-regulated enterprises
for its investment in electric generation facilities effective March 1,
1998. The Company will not be required to write-off any of its generation-
related assets including regulatory assets. These assets will be retained
on the Company's Balance Sheet because the legislation and DTE's plan for
electric industry restructuring specifically provide for their recovery
through a non-bypassable transition charge.
The principal regulatory assets included in deferred charges were as
follows:
March 31, December 31,
1998 1997
(Dollars in thousands)
Maine Yankee unrecovered plant
and decommissioning costs $33,660 $34,908
Connecticut Yankee unrecovered plant
and decommissioning costs 27,398 28,566
Yankee Atomic unrecovered plant
and decommissioning costs 2,503 2,749
Postretirement benefits costs 3,649 3,596
Transition costs 2,787 -
Other 691 647
$70,688 $70,466
The regulatory liabilities, reflected in the accompanying Balance Sheets
and related to deferred income taxes, were $3 million at March 31, 1998 and
December 31, 1997.
In November 1997, the Commonwealth of Massachusetts enacted a comprehen-
sive electric utility industry restructuring bill. On November 19, 1997,
the Company, together with Commonwealth Electric Company (Commonwealth) and
Canal Electric Company, filed a restructuring plan with the DTE. The plan,
approved by the DTE on February 27, 1998, describes the process by which the
Company and Commonwealth, beginning March 1, 1998, initiated a ten percent
rate reduction for all customer classes and allow customers to choose their
energy supplier. As part of the plan, the DTE authorized the recovery of
certain strandable costs. The legislation gives the DTE the authority to
determine the amount of strandable costs that will be eligible for recovery.
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CAMBRIDGE ELECTRIC LIGHT COMPANY
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.
The cost of transitioning to competition will be mitigated, in part,
through the divestiture of the system's non-nuclear generating assets in an
auction process that is expected to be completed in 1998. Any net proceeds
in excess of book value received from the divestiture of these assets will
be used to mitigate transition costs.
The system's ability to recover its transition costs will depend on
several factors, including the aggregate amount of transition costs the
system will be allowed to recover and the market price of electricity.
Management believes that the system will recover its transition costs. A
change in any of the above listed factors or in the current legislation
could affect the recovery of transition costs and may result in a loss to
the system. For additional information relating to industry restructuring,
see the "Industry Restructuring" section under Management's Discussion and
Analysis of Results of Operations.
(2) Commitments and Contingencies
(a) Construction Program
The Company is engaged in a continuous construction program presently
estimated at $24.8 million for the five-year period 1998 through 2002. Of
that amount, $7 million is estimated for 1998. As of March 31, 1998 the
Company's actual construction expenditures amounted to approximately $1
million including an allowance for funds used during construction. The
Company expects to finance these expenditures on an interim basis with
internally-generated funds and short-term borrowings which are ultimately
expected to be repaid with the proceeds from sales of long-term debt
securities.
The program is subject to periodic review and revision because of
factors such as changes in business conditions, rates of customer growth,
effects of inflation, maintenance of reliable and safe service, equipment
delivery schedules, licensing delays, availability and cost of capital and
environmental regulations.
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CAMBRIDGE ELECTRIC LIGHT COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
The following is a discussion of certain significant factors which have
affected operating revenues, expenses and net income during the periods
included in the accompanying Condensed Statements of Income. This discussion
should be read in conjunction with the Notes to Condensed Financial Statements
appearing elsewhere in this report.
A summary of the period to period changes in the principal items included in
the Condensed Statements of Income for the three months ended March 31, 1998
and 1997 and unit sales for these periods is shown below:
Three Months Ended
March 31,
1998 and 1997
Increase (Decrease)
(Dollars in thousands)
Electric Operating Revenues $(5,494) (16.6)%
Operating Expenses -
Electricity purchased for resale,
transmission and fuel (8,181) (35.3)
Other operation and maintenance (935) (15.4)
Depreciation 382 34.1
Taxes -
Federal and state income 1,422 339.4
Local property and other (71) (6.8)
(7,383) (23.2)
Operating Income 1,889 155.1
Other Income (33) (7.5)
Income Before Interest Charges 1,856 112.1
Interest Charges (4) (0.5)
Net Income $ 1,860 219.1
Unit Sales (MWH)
Retail 5,133 1.6
Wholesale (23,249) (28.4)
Total unit sales (18,116) (4.6)
The following is a summary of unit sales (in MWH) for the periods
indicated:
Unit Sales (MWH)
Three Months Ended Total Retail Wholesale
March 31, 1998 378,897 320,304 58,593
March 31, 1997 397,013 315,171 81,842
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CAMBRIDGE ELECTRIC LIGHT COMPANY
Operating Revenues, Electricity Purchased For Resale, Transmission and Fuel
Operating revenues for the first quarter of 1998 decreased $5.5 million or
16.6% due to decreases in electricity purchased for resale, fuel ($1.1
million) and transmission charges ($358,000), offset, in part by a 1.6%
increase in retail unit sales. During the quarter the decrease in electricity
purchased for resale of $6.7 million or 32.9% reflects lower fuel costs and a
$2.8 million deferral of costs in conjunction with the Company's restructuring
plan as approved by the Massachusetts Department of Telecommunications and
Energy (DTE). The Company has unbundled its rates, provided customers with a
ten percent discount as of March 1, 1998 and affords customers the opportunity
to purchase generation supply in the competitive market consistent with the
electric industry restructuring legislation further discussed below. Delivery
rates are composed of a customer charge (to collect metering and billing
costs), a distribution charge, a transition charge (to collect stranded
costs), a transmission charge, an energy conservation charge (to collect costs
for demand-side management programs) and a renewable energy charge. Electric-
ity supply services provided by the Company include optional standard offer
service and default service. Amounts collected through these various charges
will be reconciled to actual expenditures on an on-going basis.
Despite the increase in retail sales (1.6%), reflecting increases in sales
to all customer segments, total unit sales for the quarter decreased 4.6% as a
result of a 28.4% decrease in wholesale sales due primarily to a decrease in
sales to ISO - New England (formerly the New England Power Pool).
Operating Expenses
For the first quarter of 1998, operation and maintenance decreased
$935,000, or 15.4%, primarily due to labor savings ($429,000) realized from a
personnel reduction program initiated during the second quarter of 1997. Also
contributing to the decrease in operation and maintenance during the quarter
were lower insurance and benefits costs ($324,000). Depreciation expense
increased due to a higher level of depreciable plant. The increase in federal
and state income taxes was due to a higher level of pretax income.
Interest Charges
Interest charges for the current three-month period were virtually
unchanged reflecting lower long-term interest costs ($68,000) offset by an
increase in short-term costs ($64,000) that reflect a higher average level of
short-term borrowings.
Industry Restructuring
On November 25, 1997, the Governor of Massachusetts signed into law the
Electric Industry Restructuring Act (the Act). Provisions of this legislation
include, among other things, a 10 percent discount on standard offer service
and retail choice of energy supplier effective March 1, 1998, with a subse-
quent increase in the discount on standard offer service of up to 15 percent
upon completion of divestiture of non-nuclear generating assets and possible
securitization of net non-mitigable stranded costs; and, recovery of
transition costs subject to review and an audit process.
The Company, together with affiliates Commonwealth Electric Company
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CAMBRIDGE ELECTRIC LIGHT COMPANY
(Commonwealth) and Canal Electric Company (Canal), filed a comprehensive
electric restructuring plan with the DTE in November 1997, that was
substantially approved by the DTE in February 1998. While the Company is
encouraged with the treatment afforded stranded or transition cost recovery by
the legislation and the DTE, the mandated customer discount could have a
significant impact on future cash flows of the Company and Commonwealth.
It is now likely that a referendum will appear on the ballot in November
of this year that is seeking to repeal the legislation. The Company's
management is unable to predict what the ultimate outcome of this challenge
will be.
Auction Process
In March 1997, the Company, together with Canal and Commonwealth,
submitted a report to the DTE that detailed the proposed auction process for
selling their electric generation assets and entitlements. The process
included a standard sealed-bid auction for generation assets and entitlements
from purchased power contracts. The auction process provided a market-based
approach to maximizing stranded cost mitigation and minimizing the transition
costs that retail customers will have to pay for stranded cost recovery. A
request for bids from interested parties was issued last August followed by an
Offering Memorandum in October. Potential bidders examined all pertinent
information related to the generating facilities and purchased power
agreements in order to prepare and submit their first round of bids in mid-
December. In January 1998, the companies selected a short list of potential
bidders, each of whom submitted a final binding bid on May 8, 1998. The
ultimate selection of the winning bidder or bidders is expected to be made
after a two-week evaluation period. The closing process and the required
regulatory filings are expected to be completed in 1998.
Year 2000
The Company has been involved in Year 2000 compliancy since 1996. A
complete inventory and review of software, information processing and delivery
systems has been completed, and work continues on computer systems wherever
necessary. While some computer systems have already been updated, tested and
placed in production, the Company expects to complete the balance of the
modifications by early 1999.
Costs associated with Year 2000 compliancy are being expensed as incurred.
The total cost of this project is expected to be funded with internally
generated funds.
Management believes that with appropriate modifications, the Company will
be fully compliant regarding all Year 2000 issues and will continue to provide
its products and services uninterrupted through the millennium change.
Failure to become fully compliant could have a significant impact on the
Company's operations.
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CAMBRIDGE ELECTRIC LIGHT COMPANY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company was an intervenor in an appeal at the Massachusetts
Supreme Judicial Court (SJC) filed by the Massachusetts Institute of
Technology (MIT) involving a DTE decision approving a customer
transition charge (CTC) for the recovery of stranded investment
costs. By its terms, the CTC was terminated on March 1, 1998,
coincident with the retail access date established by the
Massachusetts Legislature in the Electric Industry Restructuring
Act. On September 18, 1997, the SJC remanded the CTC matter to the
DTE for further consideration. The SJC stated that, although
recovery of prudent and verifiable stranded costs by utility
companies is in the public interest and consistent with the Public
Utility Regulatory Policies Act, the insufficiencies of the DTE's
subsidiary findings precluded the SJC from undertaking a meaningful
review of the DTE's calculations that formed the basis of the CTC.
The DTE is in the process of determining whether to hear additional
evidence in the remand or to rely on the record and pleadings
already filed. This issue is discussed more fully in the Company's
1997 Annual Report on Form 10-K. At this time, management is unable
to predict the ultimate outcome of this proceeding.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule.
Filed herewith as Exhibit 1 is the Financial Data Schedule for the
three months ended March 31, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
March 31, 1998.
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CAMBRIDGE ELECTRIC LIGHT COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAMBRIDGE ELECTRIC LIGHT COMPANY
(Registrant)
Principal Financial and
Accounting Officer:
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Date: May 15, 1998