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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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-30057
CANAL ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1733577
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Main Street, Cambridge, Massachusetts 02142-9150
(Address of principal executive offices) (Zip Code)
(617) 225-4000
(Registrant's telephone number, including area code)
(Former name, address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [x] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock August 1, 1998
Common Stock, $25 par value 1,523,200 shares
The Company meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q as a wholly-owned subsidiary and is therefore filing this
Form with the reduced disclosure format.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CANAL ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
ASSETS
(Dollars in thousands)
June 30, December 31,
1998 1997
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost $469,900 $469,861
Less - Accumulated depreciation and
amortization 207,974 197,844
261,926 272,017
Add - Construction work in progress 4,026 2,228
Nuclear fuel in process 445 193
266,397 274,438
INVESTMENTS
Equity in corporate joint venture 3,058 3,075
CURRENT ASSETS
Cash 18 18
Accounts receivable-
Affiliates 9,613 12,159
Other 11,497 15,397
Electric production fuel oil 729 806
Prepaid property taxes - 840
Other 2,537 2,277
24,394 31,497
DEFERRED CHARGES
Regulatory assets 16,841 17,413
Other 9,861 9,774
26,702 27,187
$320,551 $336,197
See accompanying notes.
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CANAL ELECTRIC COMPANY
CONDENSED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
June 30, December 31,
1998 1997
(Unaudited)
CAPITALIZATION
Common Equity -
Common stock, $25 par value -
Authorized - 2,328,200 shares
Outstanding - 1,523,200 shares,
wholly-owned by Commonwealth
Energy System (Parent) $ 38,080 $ 38,080
Amounts paid in excess of par value 8,321 8,321
Retained earnings 56,145 53,130
102,546 99,531
Long-term debt, including premiums, less
current sinking fund requirements 83,917 83,917
186,463 183,448
CAPITAL LEASE OBLIGATIONS 10,943 11,227
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 1,275 20,850
Advances from affiliates 5,660 -
6,935 20,850
Other Current Liabilities -
Current sinking fund requirements 350 350
Accounts payable -
Affiliates 851 1,028
Other 19,168 21,335
Accrued taxes -
Income 1,591 2,054
Local property and other 16 844
Accrued interest 1,449 1,420
Other 5,144 5,328
28,569 32,359
35,504 53,209
DEFERRED CREDITS
Accumulated deferred income taxes 68,954 69,447
Unamortized investment tax credits and other 18,687 18,866
87,641 88,313
COMMITMENTS AND CONTINGENCIES
$320,551 $336,197
See accompanying notes.
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CANAL ELECTRIC COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Dollars in thousands)
(Unaudited)
Three Months Ended Six Months Ended
1998 1997 1998 1997
ELECTRIC OPERATING REVENUES
Sales to affiliated companies $27,088 $27,997 $ 56,008 $ 62,307
Sales to non-affiliated companies 15,283 16,551 34,610 43,927
42,371 44,548 90,618 106,234
OPERATING EXPENSES
Fuel used in production 17,942 19,174 43,710 55,052
Electricity purchased for resale 133 1,307 281 3,979
Other operation and maintenance 11,088 9,697 19,806 18,293
Depreciation 5,038 5,066 10,077 10,131
Taxes -
Income 2,012 2,478 4,076 5,020
Local property 604 760 1,300 1,430
Payroll and other 200 224 417 452
37,017 38,706 79,667 94,357
OPERATING INCOME 5,354 5,842 10,951 11,877
OTHER INCOME 223 114 352 238
INCOME BEFORE INTEREST CHARGES 5,577 5,956 11,303 12,115
INTEREST CHARGES
Long-term debt 1,976 1,976 3,954 3,954
Other interest charges 120 295 298 659
2,096 2,271 4,252 4,613
NET INCOME 3,481 3,685 7,051 7,502
RETAINED EARNINGS -
Beginning of period 56,700 56,437 53,130 52,620
Dividends on common stock (4,036) (3,808) (4,036) (3,808)
RETAINED EARNINGS -
End of period $56,145 $56,314 $ 56,145 $ 56,314
See accompanying notes.
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CANAL ELECTRIC COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Dollars in thousands)
(Unaudited)
1998 1997
OPERATING ACTIVITIES
Net income $ 7,051 $ 7,502
Effects of noncash items -
Depreciation and amortization 11,220 11,880
Deferred income taxes and investment
tax credits, net (900) (611)
Earnings from corporate joint venture (223) (222)
Dividends from corporate joint venture 240 241
Change in working capital, exclusive of cash
and interim financing 3,313 5,445
All other operating items (661) (2,728)
Net cash provided by operating activities 20,040 21,507
INVESTING ACTIVITIES
Additions to property, plant and equipment (2,089) (2,313)
FINANCING ACTIVITIES
Payment of short-term borrowings (19,575) (9,975)
Payment of dividends (4,036) (3,808)
Advances from (payments to) affiliates 5,660 (5,410)
Net cash used for financing activities (17,951) (19,193)
Net increase in cash - 1
Cash at beginning of period 18 12
Cash at end of period $ 18 $ 13
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 4,111 $ 4,428
Income taxes $ 4,779 $ 4,527
See accompanying notes.
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CANAL ELECTRIC COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) General Information
Canal Electric Company (the Company) is a wholly-owned subsidiary of
Commonwealth Energy System. The parent company is referred to in this
report as the "System" and together with its subsidiaries is collectively
referred to as "the system." The System is an exempt public utility
holding company under the provisions of the Public Utility Holding
Company Act of 1935 and, in addition to its investment in the Company,
has interests in other utility and several nonregulated companies.
The Company has 106 regular employees including 79 (75%) represented
by a collective bargaining agreement that will remain in effect through
May 31, 2001. Employee relations have generally been satisfactory.
The Company is a wholesale power company and operates two generating
units under life-of-the-unit power contracts on file with the Federal
Energy Regulatory Commission (FERC). The price of power is based on a
two-part rate consisting of a demand charge and an energy charge. The
demand charge covers all expenses except fuel costs and includes the re-
covery of the original investment. It also provides for any adjustments
to that investment over the economic lives of the units. The energy
charge is based on the cost of fuel and is billed to each purchaser in
proportion to its purchase of power. Purchasers are billed monthly.
The Company also procures bulk electric power at the request of and
for its affiliates thereby securing cost savings for their respective
customers by planning for a power supply on a single system basis.
On May 27, 1998, the System announced that three of its subsidiary
companies (Commonwealth Electric Company, Cambridge Electric Light
Company and the Company) have selected affiliates of Southern Energy New
England, L.L.C., an affiliate of The Southern Company, to buy substan-
tially all of their non-nuclear electric generating assets in conjunction
with electric industry restructuring in Massachusetts. The plants being
sold include: Canal Unit 1 (566 mw) and a one-half interest in Canal Unit
2 (282.5 mw) located in Sandwich, MA and owned by the Company.
(2) Significant Accounting Policies
(a) Principles of Accounting
Generally, expenses which benefit more than one interim period are
allocated to other periods to more appropriately match revenues and
expenses. Income tax expense is recorded using the statutory rates in
effect applied to book income subject to tax recorded in the interim
period.
The unaudited financial statements for the periods ended June 30,
1998 and 1997, reflect, in the opinion of the Company, all adjustments
(consisting of only normal recurring accruals) necessary to summarize
fairly the results for such periods. In addition, certain prior period
amounts are reclassified from time to time to conform with the presenta-
tion used in the current period's financial statements.
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CANAL ELECTRIC COMPANY
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.
(b) Regulatory Assets
The Company is regulated as to rates, accounting and other matters by
various authorities, including the FERC and the Massachusetts Department
of Telecommunications and Energy (DTE).
Based on the current regulatory framework, the Company accounts for
the economic effects of regulation in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting
for the Effects of Certain Types of Regulation." The Company has
established various regulatory assets in cases where the FERC has
permitted or is expected to permit recovery of specific costs over time.
In the event the criteria for applying SFAS No. 71 are no longer met, the
accounting impact would be an extraordinary, non-cash charge to opera-
tions of an amount that could be material. Criteria that give rise to
the discontinuance of SFAS No. 71 include: 1) increasing competition
restricting the Company's ability to establish prices to recover specific
costs, and 2) a significant change in the current manner in which rates
are set by regulators from cost based regulation to another form of
regulation. These criteria are reviewed on a regular basis to ensure the
continuing application of SFAS No. 71 is appropriate. Based on the
current evaluation of the various factors and conditions that are
expected to impact future cost recovery, the Company believes that its
regulatory assets are probable of future recovery.
The principal regulatory assets included in deferred charges were as
follows:
June 30, December 31,
1998 1997
(Dollars in thousands)
Deferred income taxes $13,171 $13,089
Seabrook related costs 3,670 4,324
$16,841 $17,413
In November 1997, the Commonwealth of Massachusetts enacted a
comprehensive electric utility industry restructuring bill. On November
19, 1997, the Company, together with Cambridge Electric Light Company
(Cambridge Electric) and Commonwealth Electric Company (Commonwealth)
filed a restructuring plan with the DTE. The plan, approved by the DTE
on February 27, 1998, provides that Commonwealth and Cambridge, 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
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CANAL ELECTRIC COMPANY
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.
The cost of transitioning to competition will be mitigated, in part,
by the sale of the system's non-nuclear generating assets, including the
Company's Units 1 and 2. The sale is expected to be completed by the end
of the year pending receipt of the necessary regulatory approvals. The
net proceeds from the sale of these assets will be used to mitigate
stranded costs. For additional information relating to electric industry
restructuring, see Management's Discussion and Analysis of Results of
Operations.
(3) Commitments and Contingencies
Construction
The Company is engaged in a continuous construction program presently
estimated at $19.3 million for the five-year period 1998 through 2002.
Of that amount, $10.5 million is estimated for 1998. As of June 30,
1998, construction expenditures, including an allowance for funds used
during construction, amounted to approximately $2.1 million. These
estimates include expenditures related to Units 1 and 2 which are to be
sold in 1998 pursuant to the restructuring plan approved by the DTE. The
program is subject to periodic review and revision because of factors
such as changes in business conditions, rates of customer growth, effects
of inflation, maintenance of reliable and safe service, equipment
delivery schedules, licensing delays, availability and cost of capital
and environmental factors. The Company expects to finance these expendi-
tures with internally generated funds and short-term borrowings.
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CANAL ELECTRIC COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
The following is a discussion of certain significant factors which have
affected operating revenues, expenses and net income during the periods
included in the accompanying condensed statements of income. This discussion
should be read in conjunction with the Notes to Condensed Financial Statements
appearing elsewhere in this report.
A summary of the period to period changes in the principal items
included in the condensed statements of income for the three and six months
ended June 30, 1998 and 1997 and unit sales for these periods is shown below:
Three Months Ended Six Months Ended
June 30, June 30,
1998 and 1997 1998 and 1997
Increase (Decrease)
(Dollars in thousands)
Electric Operating Revenues $ (2,177) (4.9)% $(15,616) (14.7)%
Operating Expenses -
Fuel used in production (1,232) (6.4) (11,342) (20.6)
Electricity purchased for resale (1,174) (89.8) (3,698) (92.9)
Other operation and maintenance 1,391 14.3 1,513 8.3
Depreciation (28) (0.5) (54) (0.5)
Taxes -
Federal and state income (466) (18.8) (944) (18.8)
Local property and other (180) (18.3) (165) (8.8)
(1,689) (4.4) (14,690) (15.6)
Operating Income (488) (8.4) (926) (7.8)
Other Income 109 95.6 114 47.9
Income Before Interest Charges (379) (6.4) (812) (6.7)
Interest Charges (175) (7.7) (361) (7.8)
Net Income $ (204) (5.5) $ (451) (6.0)
Unit Sales (MWH)
Increase(Decrease) 133,421 15.5 (57,970) (2.5)
Three Months Ended Six Months Ended
June 30, June 30,
MWH Unit Sales 1998 and 1997 1998 and 1997
Canal Unit 1 495,880 526,167 1,391,111 1,507,869
Canal Unit 2 357,394 256,933 713,554 555,634
Seabrook 1 69,676 51,111 141,228 126,952
Purchased for Resale - 24,994 - 113,408
992,950 859,205 2,245,893 2,303,863
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CANAL ELECTRIC COMPANY
Revenue, Fuel and Purchased Power
Operating revenues for the three and six months ended June 30, 1998
decreased approximately $2.2 million or 4.9% and $15.6 million or 14.7%,
respectively, due primarily to decreases in fuel used in production and
electricity purchased for resale. The change in unit sales during the current
periods reflects the timing of an inspection outage at Unit 1, the increased
availability of Unit 2, the timing of a refueling outage at Seabrook during
1997 and the expiration of contracts for the purchase of electricity on behalf
of affiliated retail distribution companies.
The decreases in fuel used in production during the current three and six-
month periods reflects the lower average cost of fuel oil and the decreased
availability of Unit 1. Fuel, purchased power and transmission costs for the
current three and six-month periods represented approximately 45% and 50%,
respectively, of operating revenues and averaged 1.9 cents and 2 cents per
KWH, respectively, as compared to 2.5 cents and 2.6 cents for the correspond-
ing periods a year ago.
Other Operating Expenses
During the current quarter and first six months of 1998, other operation
and maintenance increased by approximately $1.4 million or 14.3% and $1.5
million or 8.3%, respectively, due primarily to an increase in maintenance
($2.1 million and $2.4 million, respectively) primarily related to Unit 1,
offset, in part by a decrease in other operation ($678,000 and $914,000,
respectively). The decrease in other operation during the current three and
six-month periods reflects the absence of amortization related to an abandoned
nuclear unit ($58,000 and $584,000, respectively) and lower insurance and
benefits costs ($88,000 and $194,000, respectively). Federal and state income
taxes decreased due to lower levels of pre-tax income.
Interest Charges
Total interest charges decreased for both current periods due to lower
average levels of short-term borrowings.
Electric Industry Restructuring
On November 25, 1997, the Governor of Massachusetts signed into law the
Electric Industry Restructuring Act (the Act). 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 legisla-
tion increases to 15 percent effective September 1, 1999 for customers who
continue to take standard offer service.
It is likely that a statewide referendum will appear on the ballot in
November of this year that is seeking to repeal the legislation. Management
is unable to predict what the ultimate outcome of this challenge will be.
The Company, together with retail affiliates Cambridge Electric and
Commonwealth, filed a comprehensive electric restructuring plan with the
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CANAL ELECTRIC COMPANY
DTE in November 1997, that was substantially approved by the DTE in February
1998. The divestiture of the Company's non-nuclear generation assets is an
integral part of the Company's restructuring plan and is consistent with the
Act.
In March 1997, the Company, together with Cambridge Electric and Common-
wealth, had submitted a report to the DTE that detailed the proposed auction
process for selling their electric generation assets and the entitlements
associated with 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
and an Offering Memorandum followed in October. Potential bidders examined
all pertinent information related to the generating facilities and purchased
power contracts in order to prepare and submit their first round of bids in
mid-December. Final binding bids were submitted on May 8, 1998.
On May 27, 1998, the System announced that three of its subsidiary
companies (Commonwealth, Cambridge Electric and the Company) had selected
affiliates of Southern Energy New England, L.L.C., an affiliate of The
Southern Company of Atlanta, Georgia, to buy substantially all of their non-
nuclear electric generating assets for approximately $462 million (subject to
certain adjustments at closing). These facilities represent 984 megawatts
(mw) of electric capacity and have an approximate book value of $79 million.
The plants being sold include: Canal Unit 1 (566 mw) and a one-half
interest in Canal Unit 2 (282.5 mw) located in Sandwich, MA and owned by the
Company; the Kendall Station facility (67 mw) and the adjacent Kendall Jets
(46 mw), located in Cambridge, MA and owned by Cambridge Electric; five diesel
generators (13.8 mw) in Oak Bluffs and West Tisbury on the island of Martha's
Vineyard that are owned by Commonwealth, and a 1.4 percent joint-ownership
interest (8.9 mw) in Wyman Unit No. 4 located in Yarmouth, ME, also owned by
Commonwealth.
On July 31, 1998, a formal divestiture filing was submitted to the FERC
and the DTE that requests approval of the sale of the generating assets. The
required approvals of the sale are expected to be received by year-end 1998.
Environmental Matters
The Company is subject to laws and regulations administered by federal,
state and local authorities relating to the quality of the environment. These
laws and regulations affect, among other things, the siting and operation of
electric generating and transmission facilities and can require the installa-
tion of expensive air and water pollution control equipment. These regula-
tions have had an impact on the Company's operations in the past and could
have an impact on future operations, capital costs and construction schedules
of major facilities. However, the Company's electric generating facilities
are to be sold at auction in 1998 pursuant to the restructuring plan approved
by the DTE.
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CANAL ELECTRIC COMPANY
Year 2000
The Company has been involved in Year 2000 compliancy since 1996. A
complete inventory and review of software, information processing, delivery
systems and operational components for certain facilities 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 mid-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.
Forward-Looking Statements
This discussion contains statements which, to the extent it is not a
recitation of historical fact, constitute "forward-looking statements" and is
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 reflected 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 and the availability of cash from various
sources.
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CANAL ELECTRIC COMPANY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
Filed herewith as Exhibit 1 is the Financial Data Schedule for the
three months ended June 30, 1998.
(b) Reports on Form 8-K
A report on Form 8-K was filed June 5, 1998 for an event first
reported May 27, 1998 regarding the sale of the Company's generating
assets.
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CANAL ELECTRIC COMPANY
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANAL ELECTRIC COMPANY
(Registrant)
Principal Financial Officer:
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Date: August 14, 1998