-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HCmwlZhD0V7CNxL6Ii3fOmlzYAd2Wfi8tU6e9eOlRxuop6XtNiEceF1Q/TAFbOPr NXlrx657pROV5bF7nBHTVA== 0000071304-99-000013.txt : 19990402 0000071304-99-000013.hdr.sgml : 19990402 ACCESSION NUMBER: 0000071304-99-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANAL ELECTRIC CO CENTRAL INDEX KEY: 0000016906 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041733577 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 002-30057 FILM NUMBER: 99582404 BUSINESS ADDRESS: STREET 1: ONE MAIN ST CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6172254000 MAIL ADDRESS: STREET 1: P O BOX 9150 CITY: CAMBRIDGE STATE: MA ZIP: 02142-9150 FORMER COMPANY: FORMER CONFORMED NAME: PLYMOUTH COUNTY ELECTRIC CO DATE OF NAME CHANGE: 19680912 10-K 1 CANAL ELECTRIC 1998 FORM 10-K 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. 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 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 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. 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 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. 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. 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. 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 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 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. 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 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. 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 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. 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. 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. 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. 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. 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. 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. 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 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 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. 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 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 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 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 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 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 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 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. 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. 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. 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). 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). 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). 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). 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). 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). 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. 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)
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 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 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.
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 EX-27 2 FINANCIAL DATA SCHEDULE - 1998
UT 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. 0000016906 CANAL ELECTRIC COMPANY 1,000 DEC-31-1998 DEC-31-1998 YEAR PER-BOOK 191,951 2,800 327,368 24,585 0 546,704 38,080 8,321 241,965 288,366 0 0 0 0 0 0 0 0 10,551 568 247,219 546,704 181,833 8,168 152,803 160,971 20,862 186,523 207,385 8,268 199,117 0 199,117 10,282 7,854 14,063 0 0
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